2019 Year-End Commentary

Financial markets were strong across the board in 2019, as every major asset class bounced back from a rough 2018 to exhibit above-average returns. The S&P 500, one of the best barometers for US stock performance, recovered from a -4.4% loss in 2018 to gain +31.5% this year, marking the best calendar year performance for the index since 2013. Overseas equities rallied +21.5% in 2019 after seeing a decline of -14.2% the year prior, as measured by the MSCI ACWI ex-US Index. Within fixed income, the Barclays US Aggregate Bond Index gained +8.7% this year after experiencing a flat 2018. Ten-year Treasury yields sat at 1.9% as of year-end, falling nearly 80 basis points during the year as the Fed reversed course on the tightening cycle that commenced in 2018 to actually cut rates three times during 2019 amidst concerns over lagging global growth. Within real assets, the Alerian MLP Index rallied +6.6% on the year while gold prices rose +18.4%, buoyed by a modest acceleration in inflation in the second half of 2019.

Looking forward to 2020, we see a vastly different landscape compared to this time a year ago, when global recession risks were on the rise. Consensus expectations now have shifted towards further economic expansion, though geopolitical risk certainly remains. As always, we aim to filter the news and noise through the lens of our “Three Dials” framework. Below is a primer on where each of our primary indicators stand to start the year:

1. Market Sentiment and Momentum: Positive

2019 provided to be a resilient year for investor sentiment, as markets continually shrugged off concerns over a US trade war with China and falling manufacturing output to see new all-time highs for the domestic blue-chip stock indexes. Additionally, thanks to a strong fourth quarter rally, small- and mid-cap companies, along with international and emerging market equities, now appear poised carry this broad-based momentum into the new year. As such, our Momentum and Sentiment Dial is firmly in a “Positive” position for the time being.

2. Economic Fundamentals: Positive

Based on the most recent estimates, 2019 looks to be another solid year of economic growth in the US, with real GDP on track to increase +2.4% on the year. Looking to next year, the IMF projects +3.4% global GDP growth in 2020 thanks to strength from developing economies in Asia and Africa. While there are certainly risks on the horizon that could contribute to an unforeseen global slowdown in production, leading economic indicators are strong enough such that our Fundamental Dial shows a “Positive” reading heading into 2020.

   3. Valuation: Negative

Valuations appear stretched across equity markets, as the fourth quarter rally in equity prices has actually coincided with a projected decline in corporate earnings. Despite a price-to-earnings ratio well above long-term averages, S&P 500 earnings are expected to see their fourth consecutive quarter of year-over-year earnings declines. Given the dissonance between rising prices and falling earnings, our Valuation Dial remains in a “Negative” position.

On balance, our Three Dials composite reading takes a “Cautiously Optimistic” view into the new year, as strong showings in the areas of Momentum and Economic Fundamentals are balanced by Valuation concerns.

Sources:

https://www.morningstar.com   

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/TextView.aspx?data=yieldYear&year=2019

https://apps.newyorkfed.org/markets/autorates/fed%20funds#Chart12

https://www.bls.gov/news.release/pdf/cpi.pdf

https://www.imf.org/en/Publications/WEO/Issues/2019/10/01/world-economic-outlook-october-2019

https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_010320A.pdf