4Q19 Market Overview
What a difference a year makes! At the end of 2018, market sentiment was deteriorating, and some predicted a looming recession given the manufacturing weakness and volatile U.S.-China trade policy negotiations.
For those investors that looked past the noise, significant rewards were recognized in 2019. Global equity and fixed income markets posted impressive returns and extended the current economic expansion to 129 months.
As the attention moves away from U.S.-China trade, Brexit and President Trump’s impeachment hearings, volatility is likely to return when the focus turns to the November Presidential election. If tensions don’t escalate with Iran, the markets should pay more attention to corporate profit margins and whether global growth can hold steady at 3.1% or move higher in the new year.
Regardless of the market direction, our rebalancing process will take advantage of the market movements to shift towards our target allocations in the most tax-efficient manner possible while maintaining your desired risk level.
Tax Legislation Update: With the passage of the new Secure Act effective January 1, 2020, mandatory retirement distributions now begin at age 72 versus 70.5. In addition, the income tax planning consequences relating to inherited IRA’s are now less flexible and more costly since distributions in most cases will take place over ten years rather than life expectancies.
U.S. Equity Markets
U.S. equity markets posted exceptional gains with the Russell 3000 returning 9.1% in the final quarter, adding to the robust 31.0% annual gain. In December, U.S.-China trade tensions faded with the phase-one deal announcement signed on January 15th. This positive development along with an accommodative Federal Reserve bank and more stable economic data helped the U.S. markets finish the year on a high note. Driven by a healthy consumer, the U.S. economy grew at a 2.1% clip in the third quarter and the employment landscape continued to impress. The U.S. Labor Department reported that employers added 145,000 jobs in December which carried the full year growth figure to 2.1 million jobs. With unemployment at a five-decade low of 3.5%, it appears that we are very close to the bottom in this tight labor market. Moving forward, stable corporate earnings are expected to regain their growth footing which could help move markets higher in the new year.
International Equity Markets
International developed equity markets closed out the year with a positive 8.2% quarter gain for the MSCI EAFE and more impressive 22.0% annual gain. Eurozone equities were supported by the positive U.S.-China trade deal and better than expected German economic data. Favorable consumption and rebounding exports helped the German economy expand slightly to avoid a recession. On November 1, Christine Lagarde took over as president of the European Central Bank and urged governments to increase public investment to help stimulate Eurozone demand. Japanese equity markets experienced a robust 8.6% quarter return as their economic data reflected service sector strength to help offset manufacturing weakness. On October 1, Japan implemented its first consumption tax increase in five years from 8% to 10%. Although consumption spiked before the tax was implemented, it is too soon to tell the longer-term impact of the tax. The MSCI emerging markets rose 11.8% as U.S.-China trade relief provided the biggest boost to China and the emerging market footprint. Although the international markets had attractive returns in 2019, they still significantly lag the U.S. markets over the past ten years. This underperformance makes both developed and undeveloped international markets look even more attractive from a valuation perspective compared to U.S. markets, however, it may take coordinated fiscal stimulus to jump start stagnant international economic growth.
Fixed Income Markets
Safety-minded investors experienced modest results as the closely watched Barclays Aggregate rose 0.2% during the quarter and added to the strong 8.7% year-to-date gain. As widely expected, the Fed cut interest rates in October to further support U.S. economic growth and reduce any lingering recession fears. Factoring in this accommodative posture, the 10-year Treasury drifted from 1.68% on September 30 to 1.92% on December 31. Given the yield expansion, longer maturities felt most of the pain. The Barclays US Government Long posted a 4.1% quarter loss, Intermediate 0.1% gain and Short 0.5% gain. In the international fixed-income arena, the JPM Non-US Unhedged lost 0.2%. Robust demand and limited supply helped elevate the Barclays Municipal another 0.7% as investors searched for more favorable after-tax returns and celebrated a full year return of 7.5%.