Fourth Quarter 2019 Market and Economic Review

Market Review

During the fourth quarter of 2019, equity markets rose significantly around the world with a few indices at or near all-time record highs. Fixed income and cash lagged as there was a definite movement of assets from these “safer categories” to the so-called “risk ON trade.”

The S&P 500 index, which tracks large U.S. companies, was one of the record setters as it moved above the 3,200-mark for the first time in history. After a dip in early October dominated by the fears of tariffs and Impeachment, higher than expected earnings and positive news on trade moved the markets up sharply the last two months to finish a tremendous year. For the quarter the S&P 500 index price was up 8.53% and up 28.88% for the year which was the indices best yearly performance since 2013.

Small US companies also moved up, but they remain off the record highs set in September of 2018. The Russell 2000 index, which tracks small U.S. companies, ended the quarter up 9.94% and up 25.52% for the year.

Many international countries depend on exports more than the US and the overseas slowdown has been more severe alongside tariff worries. Asia was concerned with the protests in Hong Kong and the possible response by the Chinese government. The widely followed and broad MSCI EAFE which follows Europe, Asia, and the Far East has still not approached its high set early in 2018, but it showed a nice rally in the fourth quarter. It ended the quarter up 8.17% and up 22.01% for the year.

Bonds lagged significantly in the quarter as money moved out of fixed income and cash to buy stocks. The yield on the 10-Year US Treasury stands at 1.88%. The national average for 30-year mortgages stands at 3.99%.

For a diversified portfolio, here is an update of benchmark returns.

* Each benchmark is allocated based on assumed Risk Profile of underlying indexes.

**Benchmarks include a mixture of ICE BofAML US 3-month Treasury Bill Index, Barclays Global Aggregate Bond Index, Barclays US Aggregate Bond Index, MSCI EAFE Index, and the Value Line Composite Index (Geometric). These benchmarks are the same as those in the Risk/Return and Account Analytics sections of client quarterly performance reports. By comparing your portfolio’s return to the benchmark with the closest risk/return characteristics, you get a more accurate reading of portfolio performance than using a less diversified benchmark, such as the S&P 500 index.

Economic Review

Worries of a US/China Trade War, Hong Kong, and worldwide recession dominated the first couple of weeks of the fourth quarter creating anxiety about future economic growth. The Presidential impeachment was a non-factor as the markets believe getting a two-thirds vote in the Senate for conviction and removal is near impossible. The markets have dealt with dysfunction in Washington for a couple of years and have grown used to it. When a preliminary deal was coming together to remove or delay Chinese tariffs and earnings came in above expectations, many economists reacted positively.

The U.S. economy grew according to the third-quarter GDP reading (the latest available) at 2.1 percent. While this is not an overwhelming growth number it is better than the 2.0 reading in the second quarter showing that the anticipated weakening and recession have not materialized.

The Federal Reserve’s three rate cuts have both “normalized the yield curve” and inspired confidence in consumers and some areas of business. A likely factor in the trend reversal in GDP, as well.

In Europe, the European Central Bank (ECB) has a new chair as Christine Lagarde took over for Mario Draghi on October 31^st. Under Draghi, the ECB had restarted quantitative easing and was making asset purchases. It is thought that Lagarde will be more focused on European fiscal spending and try to reduce monetary stimulus. This could bring European rates out of negative territory. German GDP remains weak, but it continues to avoid recession.

In the UK, it looks like Brexit is coming sooner rather than later. The deadline is January 31, 2020. The recent elections increased Boris Johnson’s power and a Withdrawal Agreement Bill passed December 20^th by a 358 to 234 vote. Assuming the bill passes the European Parliament, the UK will officially depart the European Union following a “transition period” that will require at least the remainder of the year. That transition period will be used to negotiate trading terms and moves the risk in the markets regarding a “No-Deal” on trade and security matters to the end of next year.

Japan, the third-largest economy in the world, continues its slow growth. Estimates by the International Monetary Fund anticipate a growth of 0.5%. An aging population and lack of quality replacement workers remain a great challenge.

China’s economy continued to slow, expectations are for 6-7% growth, but that is down significantly from the 14% number of a few years ago. The trade war has taken its toll on the “optimism” of the average Chinese consumer. Food has been especially hard hit with price increases that have averaged 10-15%. The cost of pork has doubled.

We will continue to monitor portfolios and make changes as appropriate. We wish all a happy, healthy, and prosperous New Year!