Fourth Quarter Market Commentary
Fourth Quarter 2019 Market Commentary
January 26, 2019
Summary: The fourth quarter of 2019 saw most stock markets move meaningfully higher, while bonds took a breather after earlier advances.
The fourth quarter of 2019 was overwhelmingly positive for major equity (stock) indices. Domestically, the S&P 500 Index, representing U.S. large cap stocks, gained more than 12% (“cap” is short for capitalization, meaning the total value of a company’s outstanding shares, so large-cap generally equates to large company). Meanwhile, U.S. small caps, as measured by the Russell 2000 ETF (IWM), continued to lag large caps, as they had for much of 2019, but nevertheless rose 11% for the quarter. Internationally, we also saw indices rise: developed country stocks, as measured by the MSCI EAFE Index Fund ETF (EFA), gained just under 8%; and emerging market stocks, as measured by the Vanguard FTSE Emerging Markets ETF (VWO), rose slightly less than 12%. Bonds, which rose in value earlier in 2019 in response to the Federal Reserve (“Fed”) reducing interest rates, took a breather in the fourth quarter. Their value, as measured by the Vanguard Intermediate-Term Treasury Fund (VFITX), fell slightly (-0.6%) for the quarter.
All told, 2019 was an incredibly positive year across the board for both equity (stock) and debt (bond) markets. Assuming adequate diversification, it’s likely that—whether you held stocks or bonds—your holdings grew at levels considerably greater than average historical norms. For the year, we saw the S&P 500 Index rise roughly 31%, surging to all-time highs and finishing the year 10% above its 2018 peak. The Russell 2000 index climbed by about 25%, and international developed and emerging equities advanced by 22% and 21% respectively, as measured by the holdings mentioned earlier. Although appreciation in most bonds slowed in Q4 2019, annual performance still came in strong with the Vanguard Intermediate-Term Treasury Fund posting a gain of 6.3%.
Looking forward, it is unreasonable to expect similar gains again in 2020. The U.S. presidential election remains at the forefront of the news cycle, and history has demonstrated that stock markets often pull-back or consolidate until a clear favorite emerges in polling data. Markets don’t care so much which party wins the white house, as long as at least one of the three elected bodies (House of Representatives, Senate, or Presidency) is held by the other party, meaning we’ll have lots of gridlock. Gridlock is something with which markets seem surprisingly comfortable, since it means that neither party can pass major, partisan legislation). But markets never wear uncertainty well, so if the presidential election provides too much of it, expect stock market gains to be harder to come by.
The list of events that can impact markets is, of course, endless. However, several things besides the election have the potential to cause volatility and market declines: the rising level of conflict in the Middle East; the coronavirus infections spreading throughout China and the rest of the world; and the Federal Reserve Board’s handling of interest rates.
From a long-term perspective, stocks remain in a “secular” (i.e., 10-20 year) bull market, and we don’t yet see any signs of that ending. Looking shorter-term, however, rarely in the last 40 years have we seen gains like those that occurred in 2019 repeated the following year. Note how, in the bar-graph below (source: J.P. Morgan), aside of the dot-com bubble of the late ‘90s, years in which the S&P 500 returned more than 20% were always followed by substantially lower returns. It is important to have reasonable expectations and, while our crystal ball is far from perfect, we expect 2020 returns more in line with historical averages.
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 Source data: FastTrack
 Source data: FastTrack
 Source: Ned Davis Research, Equities: U.S. Focus: Presidential cycle choppy into mid-2020. October 23, 2019