MARKET BRIEFS: Q4 RECAP AND Q1 OUTLOOK

We are the Tortoise…   |   Market Review Q4 2019  |   The Little Index That Could.

Background

2019 gave us plenty of news and a lot to think about. The Federal Reserve (Fed) changed its policy outlook mid-year, and recession worries rose as the trade tensions mounted. Manufacturing data and indicators related to international trade showed weakness. In the end, US consumption remained strong through 2019. The US economy continued steadily forward with low unemployment and rising but still low inflation. In international markets, Europe and China’s exposure to trade and reliance on manufacturing made them casualties of the trade war, requiring global central banks to intervene with added stimulus. Despite these challenges—or maybe thanks to the central bank reactions they prompted—investors enjoyed impressive returns for 2019 in almost all financial assets. Even though the global economy is now a full decade into a historic expansion, the overall growth during the decade has been mediocre compared to previous expansions, leaving room for continued expansion.

Ask a question about Jerry's update

• December 2019 not only marked the end of a year, but also the end of a decade, and what a way to end the decade with US equities seeing a 31.5% return for 2019. US equities were up in 9 of the 10 years of the past decade and one of only two decades to not see a bear market and the first decade since 1850 that didn’t see a recession. This was a very different experience to the prior decade and, some would say, helped by starting from a low base in 2010.
• Within US equities, it was all about technology, as the sector surged during the fourth quarter with a return of 14.4%, leading to a full year return of 50.3%. With a weight of over 20% in the index, technology contributed to a third of the return of the S&P 500. The bond proxy sectors of real estate and utilities had a tough final quarter but still saw returns above 20% for the full year. Energy was the only sector not to see a return above 20% for the year.
• In the cap-weighted index of the S&P 500, a few stocks have outsized influence on returns. Heading into the decade Apple, Amazon, Microsoft and Google had a combined market cap of $716 billion. Coming out of the decade that group’s combined market cap rose to $4.1 trillion. Add to that Facebook, which rose from $80 billion in 2012 when it went public to $575 billion today, and these five companies comprise a little less than 17% of the index and their success (or failure) has large influence on the returns of the index.

Ask a question about Zoë's update

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%).

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%.

Ask a question about Jason's update

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