Q4 Market Update - AssetMark

Fourth Quarter 2019

Jason Thomas

The Little Index That Could.

Jason Thomas, Ph.D., CFA

Chief Economist

AssetMark, Inc.

The story

In 2019, the S&P 500 defied expectations of a downturn. Concerns about the trade conflict with China, slowing economic growth and stretched valuations led investors to pull $61 billion out of US equity mutual funds and ETFs.1 And yet, the S&P 500 soared by 29%, (+31% total return, including dividends), the strongest annual return since 2013. The index reached 35 new all-time highs last year, with 20 of those days coming in the last two months. US equities also bested other major global markets, outperforming Japan (15%), Europe (23%), and emerging markets (15%).

Median S&P 500

The reality

The strong calendar year return must be viewed in the context of the low starting point following the almost 20% sell-off in Q4 2018. From the high on September 20, 2018, the S&P 500 has returned a more modest 10%.

Further, a significant portion of the return of the S&P 500 Index has been driven by a small number of large companies. The top 10 contributors were responsible for over 30% of the Index return.

The bottom line

Narrow market leadership has historically been interpreted as a sign of weakness, an indication that market performance does not reflect the underlying economic reality. But the current reality is that a set of “superstar” companies are building and/or using technology to sustain profit margins that are higher than other companies. While the dynamic may not last forever, substantial wealth is being created in the meantime.

As of Q4, 2019. Source: Standard & Poor’s, Goldman Sachs Economics Research

The large/small company comparison reflects a number of differences, including the underlying sector composition and the susceptibility to higher labor costs in the US. While the dynamic may not last forever, in the meantime the performance of market capitalization-weighted equity indices will likely benefit.

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1 As of November 2019. Source: Strategic Insight Simfund, JP Morgan Asset Management.

S&P 500 measures the performance of 500 leading companies in the U.S. Constituents generally have a market-cap above $5 billion and represent approximately 80% of the investable market.
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C20-15411 | 01/2020 | EXP 01/31/2021

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Jason Thomas is also Chief Executive Officer & Chief Investment Officer of Savos Investments, a division of AssetMark, Inc. Savos Investments is a division of AssetMark.

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