Market Commentary Posted on

2019 Year-End Market Commentary and Outlook

Data Source: Bloomberg

December 2019 Highlights:

  • Global stocks posted positive returns (MSCI All-Country World Index or ACWI up 3.5%) in December.  MSCI Emerging markets and Pacific ex Japan powered ahead for the month, returning 7.5% and 5.8%, respectively, followed by MSCI Europe (up 3.9%), MSCI Japan (up 2.1%), and the S&P 500 (up 3.0%).
  • Global stocks extended their rally as fears of another collapse in trade discussions between the U.S. and China dissipated replaced by hopes for a Phase 1 trade agreement.  The U.S. Federal Reserve’s backstop and liquidity support of secured overnight funding operations (a.k.a. repo market) also relieved investor anxiety over a potential year-end liquidity run by highly leveraged borrowers. 
  • In December, U.S. large caps and small caps performed in line with each other (3.0% each) while S&P Pure Value edged out Pure Growth (2.6% and 2.4%, respectively). 
  • The energy sector recovered from its October-November sell-off on the back of a strong 7% return in S&P GSCI Commodities.  Energy led all major sectors followed by Technology and Healthcare.  Defensive sectors (apart from utilities) such as Staples and Real Estate lagged as did Industrials. 
  • Among factors, High Quality continued its 2nd half of 2019 domination as it was the only factor to outperform the S&P 500 in December.  Minimum Volatility and Momentum suffered as defensive, interest-sensitive stocks couldn’t keep up with the strong year-end equity advance. 
  • U.S. Fixed income (Bloomberg/Barclays (“B/B”) U.S. Aggregate Bond) was down 0.1% in December; however, risky debt benefited from this month’s equity rally with B/B EM Local Currency debt up 3.7% and B/B High Yield up 2.0%.  A weaker dollar also helped non-U.S. dollar-denominated debt (B/B Global Agg ex US up 1.1%). 
  • S&P Precious Metals performed strongly (up 3.7%) on the heels of the Fed’s dovish pivot to let inflation run a little hot as was implied following the October meeting. Dow Jones U.S. REITs (up 0.6%) could not keep up with the broader equity advance. 

4th Quarter 2019 Highlights:

  • Catalyzed by progress on U.S./China trade discussions and an increasingly dovish U.S. Federal Reserve interest rate policy, MSCI Emerging Markets and the S&P 500 helped propel a strong equity advance in the fourth quarter.  MSCI ACWI was up 9.0%, led by MSCI EM (up 11.8%) and Pacific ex Japan (up 10.5%) followed by the S&P 500 (up 9.1%), MSCI Europe (up 8.8%), and MSCI Japan (up 7.6%).     
  • As the ping-pong match between U.S. / China trade and investor reactions continued unabated with no end in sight, signs of ‘progress’ were emerging as the Trump administration delayed the imposition of the $300 billion additional tariffs scheduled to be imposed, first in October, then December, and now shelved with impending signs of a Phase 1 trade agreement. 
  • Indeed, it was a strong quarter for 2019 growth-style equity plays that spilled over into December as investors cheered the Santa Claus rally that has propelled the S&P 500 to trade at 18.3 forward earnings. 
  • For the quarter, U.S. large caps outperformed small caps while value marginally outperformed growth.  Among risk factors, High Quality was the only factor to outperform the S&P 500 for the quarter while Minimum Volatility lagged as higher interest rates weighed on this rate-sensitive factor.
  • Growth sectors, such as Technology and Health Care outperformed cyclical (Industrials, Energy, Materials) and defensive, rate-sensitive sectors (Staples, Utilities, Real Estate).
  • Driven by strong performance in December, S&P GSCI Commodities performed well, returning 8.3% for the quarter as 1-month spot oil prices rallied to $61/barrel from $54/barrel at the beginning of the quarter. 
  • U.S. investment-grade fixed income (B/B U.S. Aggregate Bond Index) was marginally up for the month (0.2%), although emerging market debt and high yield performed well with the rally in global equities as B/B EM Local Currency returned 5.3% and B/B High Yield returned 2.6%.
  • The 10-Year U.S. Treasury yield rose to 1.92% from 1.69% at the beginning of the quarter as bond investors began to price in reflation from an easing in U.S./China trade tensions and a more dovish U.S. Fed.

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By: Benjamin Lavine