Year in Review – 12 Months Ended September 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. 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. As 2019 wore on, the Fed went into a rate cutting posture to confront diminishing inflation and a global economic slowdown.
Major Economic Events
Growth in the US was above average. Employment expanded steadily, inflation remained under control, and housing prices rose. Consumer confidence remained very high, as evidenced by high spending. Profit growth waned, but 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 Germany’s growth ground to a halt. 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 even armed conflicts in the Gulf did not cause an enduring rise in prices.
The Equity Markets
Global stocks ended with an underwhelming gain of 2%. 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 small losses, while the broad US stock market achieved a small gain (just under 3%). Within the US, several sectors (real estate, utilities, consumer staples) turned in surprisingly strong results. Technology stocks also did
relatively well, although the rate of growth tapered significantly. Despite what appear to be ideal conditions (low interest rates, supportive government policies), small cap stocks lagged significantly, and ended the year with losses. Many firms reported that the twin effects of tariffs and rising labor costs are hampering their business. 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 quite 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.