Year in Review – 12 Months Ended June 30th, 2019
The world endured an uncomfortable degree of political uncertainty, much revolving around US efforts to remake the world trading/economic order. After a long period of investor complacency, concerns about the impacts of this policy were clearly demonstrated by the end of 2018. Despite the apparent momentum behind populist leaders in several countries, corporate influence and profits remain at astounding levels. Despite much turmoil, conditions favor investors and the stock market’s rebound in 2019 reflects this.
Most national economic statistics were relatively strong. The year was positive for the American economy and consumer, although growth slowed as the year wore on. Purchasing power gathered strength due to low inflation, and wages rose a bit faster than in previous years as unemployment fell to levels considered impossible just a few years ago.
The Federal Reserve began the period intending - in response to a strong economy - to continue to raise interest rates and shrink its swollen balance sheet. For years, the Federal Reserve has warned of the imminent onset of inflation, given economic growth and low unemployment. The absence of inflation has prompted a re-think at the Fed and official optimism on this front has increased. By mid-2019, not only had thoughts of rate increases been shelved, but the markets anticipate imminent rate cuts.
Major Economic Events
Growth in the US was slightly above average. Employment expanded at an increased clip, inflation remained under control, and housing prices rose. Consumer confidence remained very high, as evidenced by high spending. Although the rate of profit growth slowed, margins remain at extremely high levels.
The global economy expanded but growth faded. Europe’s economic recovery stalled as several countries fell into recession and even Germany’s growth waned. The British economy underperformed. Contrary to what most expected however, the interminable Brexit saga has not had a drastic effect on British and European economies. China’s growth continues apace but is far below the rate achieved during the past decade. The Chinese government has struggled to develop policies to manage the trade war’s impacts. Oil prices plunged at the end of 2018. American supply has surged, OPEC’s efforts to contain the market sputtered, and the drastic sanctions that were to be placed on Iran’s oil exports were delayed. Although energy prices rebounded very strongly in 2019, they remained below the year earlier level.
The Equity Markets
Global stocks ended with a respectable, if unspectacular, gain of 6%. Stock markets endured a very sharp fall during the 4th quarter of 2018, followed by a surge in 2019. An unfortunate confluence of a Federal Reserve interest rate hike, some tepid economic news, and the proclamation by President Trump that he is a Tariff Man shook investor confidence dramatically. In 2019, some of these trends seemed to reverse, as a trade deal with China was repeatedly proclaimed imminent and the Fed dropped its plans for steady rate increases. Corporate profits remain extremely high and stock buybacks continued to support the overall market.
The American stock market performed better than its international counterparts. Overall, international markets ended with a minuscule gain, while the broad US stock market achieved a typical gain (9%). Within the US, large cap growth (technology, health care) dominated although several other sectors (real estate, utilities) turned in surprisingly strong results. Despite what appear to be ideal conditions (low interest rates, supportive government policies), small cap stocks lagged significantly, and ended the year with small losses. Among international stocks, emerging markets fared the best, followed by Europe and then Japan. The Trump administration policy of confrontational trade stances and tariffs significantly impacted many countries, most particularly China. Natural resource stocks tracked the price of oil and, despite gains in 2019, ended the period deeply in the red. REIT investors celebrated the cessation of Fed tightening and the fall in interest rates.
Overall, the effects of diversification from the traditional S&P 500 index were very negative. Every major asset class fell significantly short of the S&P 500, except for REITs.
The Fixed Income Markets
It was a strong year for bonds. Prices rallied as stocks fell in October and December, and then surged in 2019 as the Fed signaled an end to tightening and interest rates for most bonds tumbled. International bonds also rose, although at a more moderate pace. Cash and similar investments have benefited from the Federal Reserve’s increases in rates and the rate of return on money market funds approximately matched the inflation rate.