Q4 2019 Market Commentary with Darin Richards

Each quarter, Aldrich Wealth Partner Nicole Rice and Chief Investment Office Darin Richards provide market commentary and make projections for the upcoming quarter. This conversation is accompanied by a deeper dive into market performance and outlook, as well as featured articles on popular topics such as retirement planning and changes in interest rates.

Executive Summary

Equity markets closed out the year on a high note, as news of a phase-one trade deal between the United States and China bolstered investor sentiment.

The S&P 500 Index added 9.1% for the fourth quarter and ended the year up 31.5%. Likewise, non-U.S. stocks (measured by the MSCI EAFE Index) increased 8.2% for the quarter, bringing annual returns to 22.0%.

Despite an 11.8% jump during the quarter to pace global equity markets, the MSCI Emerging Markets index remained behind its developed market brethren with an 18.4% advance for the year. The Barclays U.S. Universal Bond Index added 0.45% for the quarter, bringing annual returns to 9.3%. The yield on the 10-Year Treasury rose from 1.65% to 1.92% over the quarter. The formerly inverted yield curve normalized, as the 10-Year Treasury yield ended the year above the 2-Year Treasury yield.

The U.S. economy continued its expansion over the quarter. Consumer confidence is strong, and unemployment reached a 50-year low of 3.5% in November. A month prior, the accommodative Fed cut interest rates by 25 basis points for the third time in 2019.

Despite these positive developments, business confidence weakened as trade concerns dampened spending.

The S&P 500 delivered returns of 9.1% for the fourth quarter of 2019, bringing annual returns for the most-watched U.S. large-cap index up to 31.5%. Ten of the 11 underlying sectors notched positive returns for the quarter, with Technology, Health Care, and Financials leading the way. The strong quarterly performance for Technology continues an annual trend. On the year, the sector returned 50.3%. Real Estate was the lone sector to record a negative return for the quarter. Small-cap stocks outpaced their large-cap brethren, and growth bested value. FactSet reports the Q4 2019 blended earnings decline for the S&P 500 to be 2.2%. For the year, earnings growth is estimated to be a meager 0.3%. The estimated annual earnings growth is the lowest since 2015 when earnings declined 0.6%.

Non-U.S. stocks, as measured by the MSCI EAFE Index, finished the quarter up 8.2%. Christine Lagarde succeeded Mario Draghi as president of the European Central Bank (ECB) in November, bringing the eight-year reign of the influential central banker Draghi to an end. Immediately before his exit, Draghi initiated a new round of quantitative easing under which the ECB will purchase $22 billion per month in bonds and other financial assets for “as long as necessary.” The key interest rate for the ECB has remained at negative 0.5% since September. UK Prime Minister Boris Johnson and his Conservative Party bolstered their majority after December elections on the promise to “get Brexit done.” Johnson has pledged that the UK will leave the EU by the end of January 2020. For the year, the MSCI EAFE Index returned 22.0%.

Emerging-market stocks finished the quarter up 11.8%, buoyed by improvements surrounding the US-China trade dispute. President Donald Trump signed a “phase-one trade deal” on January 15. For the year, the MSCI Emerging Markets Index returned 18.4%. Trade tensions weighed heavily on emerging market equities, and increased uncertainty contributed to lower relative returns.

The Barclays U.S. Universal Bond Index ended the quarter up 0.45%. For the year, the index finished up 9.3%. Over the quarter, the yield on the 10-Year Treasury increased 27 basis points, ending at 1.92%. For the year, the 10-Year Treasury yield decreased 74 basis points. The final quarter of 2019 also saw a reversal of the inverted yield curve, with the 10-Year Treasury yield finishing the year above the 2-Year Treasury yield. High-yield and emerging-market bonds were the best performers for the quarter as credit spreads narrowed in response to positive trade developments.

The U.S. economy, as measured by gross domestic product, grew 2.1% during the fourth quarter of 2019. The unemployment rate dropped to a 50-year low of 3.5% in November. Average hourly earnings increased 3.1% over the prior year. Additionally, consumer sentiment increased over the quarter. Despite all these positive factors, the ISM Purchasing Managers Index (PMI) ended the quarter at 47.2%, its lowest level since June 2009. A PMI reading below 50.0% suggests the manufacturing sector is in contraction. The S&P CoreLogic Case-Shiller 20-city home price index increased 2.2% year over year.

Virtually all asset classes delivered strong returns in 2019, a rarity by historical standards. In the U.S., the S&P 500 Index rose 31.5%, and the Barclays US Universal Bond Index increased by 9.3%. At present, the U.S. consumer appears to be on a strong footing, with unemployment rates at historic lows and wages ticking upward. President Trump signed a phase-one trade deal between the U.S. and China on January 15, and optimism for continued resolution between the two countries is high. Against this backdrop, fear of economic recession has abated.

Regarding domestic equity markets, it should be remembered that the 31.5% annual increase in the S&P 500 Index came on the heels of a nearly 20% drop in the value of the large-cap index during the closing months of 2018. Earnings growth for the S&P 500 Index was a minimal 0.3% for 2019, meaning 2019 returns were driven primarily by increased valuations. The estimated S&P 500 Index earnings growth rate for 2020 is 9.6%. Entering the New Year, investors should temper their expectations as relatively high stock valuations, and low bond yields will likely result in more modest returns in 2020.