Investment markets were robust in 2019, but very mature economic and market cycles, a U.S. presidential election, uncertain trade agreements, and continued low interest rates will all influence the start of the '20s.
Following is our analysis of recent market performance and a look into the new decade.
2019’s Market & Economic Influences
||During 2019, the U.S. economy continued with low inflation and growth that was fueled by low interest rates, cheap commodities, technology advances, and consumer spending. Despite a mature market cycle, 2019 delivered asset prices that appreciated in tandem with the expansion.
|Interest rates fell in 2019—an unexpected pivot that further fueled U.S. economic expansion as companies and consumers accessed inexpensive capital. Companies expanded or repurchased their stock with cheap debt, and consumers, whose spending accounts for roughly 70% of GDP, purchased assets like homes, cars, and appliances. The Federal Reserve Bank also re-invoked their stimulus and began purchasing bonds again in order to keep rates low without changing the banking rate.|
Last Quarter's Asset Class Performance
U.S. stock prices rallied again in the fourth quarter of 2019 to finish the year with record highs in most indexes.1 The S&P 500 was up over 31.5% for the year. Foreign stocks also rallied, with Europe and Latin America posting more than 20% for the year and the Pacific and emerging market regions posting between 18-19%. There were a few exceptions: Hong Kong, India, Spain, and South Korea all grew only between 5-10% during 2019.
Bond markets also rallied during 2019, with big gains in the first few months of the year and a slight bump in Q4, when fund flows were positive for money market, municipal bonds, and corporate bonds. Stock fund flows turned negative during December, as investors may have been "locking in" stock gains prior to year-end.
High yields ended up 2.61% during Q4 and up 14.32% for the year. High-yield muni bonds were up 0.90% for the quarter and 10.68% for 2019. Lastly, emerging market bonds were up 2.09% for Q4 and 14.42% for the year.
Market & Economic Influences for 2020
What is and isn’t currently in the headlines can be a guide to the factors that are shaping the trends for 2020. This year’s headlines will continue to include the U.S.-China trade deal, Brexit, and the U.S. presidential election.
U.S.-China Trade Deal: The most significant economic impact for 2020 could be the trade deal as it affects much of Asia and directly impacts the cost of goods for U.S. consumers and companies. While Brexit will not be a significant event for the U.S. economy, it does destabilize the Euro region.
The Election: A U.S. presidential election historically creates uncertainty for the U.S. stock market, and this year’s election will likely generate short-term volatility that will resolve after November.
Taxes: Any change in power would influence policies and laws that would affect the U.S. business and economic environments and trickle into global markets. We may very well be in the lowest corporate tax environment of our lifetime. Should the election produce a Democratic win, we could see a significant change in taxes. While that would take at least a few years to move through Congress, current candidates’ proposed tax structures vary greatly.
Variables that aren’t currently dominating headlines but will influence markets include global interest rates, the Federal Reserve stimulus bond purchases, technology, a new spending generation, and inflation. Negative interest rates in both foreign bonds and Fed bond purchases create significant demand for U.S. Treasuries, and that demand will keep U.S. interest rates low. Should companies continue borrowing at low rates and buy back shares, we'll see stock prices rise even higher. Both factors—low rates and higher stock prices—could lead to asset inflation, which could parallel price inflation caused by tariffs and higher production costs. While technology advances create efficiencies, the high value of technology companies may lead to excesses akin to the 2000-2002 era.
Shifting demographics, changes to global trade, and technology advancements will lead to improvements for companies and the consumers they serve. In the coming decade, we’ll see millennials become a driving economic force. Medical advances will continue to extend human lives and reduce suffering. The speed of digital transfer and sharing of data will expand our capabilities and will improve the use of our natural resources.
2020 Q1 Market & Economic Outlook
Economy: We believe the low growth/low interest rate scenario will continue to play out well into 2020. That environment, combined with low unemployment and a lack of inflation, will bode well for corporate performance and our economy. Worries about a coming recession seem unfounded but persist as the expansion moves toward its 11-year anniversary.
Equities: Record high stock prices for year-end 2019 will make future gains more difficult, and uncertainty generated by the coming elections will spur volatility. This year’s returns will be more modest than last year’s 20-30% gains, which were created by expansion in the multiples. Resolving trade issues, maintaining growth with low interest rates, and corporate earnings and profits will be key drivers for U.S. stock prices this year.
Bonds: Bond prices are relatively high, which means the yields are relatively low. We’ll only see further bond price increases if stock prices fall and drive up bond demand. Historically, when bond yields and stock dividend yields are similar, investors mistakenly purchase stocks with a high yield as a "bond substitute." When stock prices fall, investors flock back to bonds, reinforcing the notion that bonds are much less risky than stocks and that yields are
more sustainable as a core part of any well-balanced portfolio.
If you’d like to discuss your investment strategy in light of market and economic factors, we’d be happy to talk. Feel welcome to contact us directly or start a complimentary consultation. We’ll follow up within a business day.
Kelly Crane, CFP®, CLU, CFA, MBA
President & Chief Investment Officer
Like this post? Subscribe to our newsletter for more updates.
Effective wealth management requires proactivity and strategy. Subscribe today to get our analysis of current market and economic events and strategies to help your money work more efficiently, to retire successfully, and to build and protect your wealth.
We promise to never sell your contact information, and we won’t bombard you with emails.
1 Source: All data in this section is sourced from LPL Financial. Data as of 12/31/2019.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Bonds are subject to market and interest rate risk if sold prior to maturity.
Bond values will decline as interest rates rise and bonds are subject to availability and change in price. An increase in interest rates may cause the price of bonds and bond mutual funds to decline.
Stock investing involves risk including loss of principal.