Greetings!
We have officially closed the book on the fourth quarter and with it calendar year 2019, which was the best year for US equities since 2013 as the S&P 500 (SPX) notched a price return of 28.88% for the year. With such a large gain last year, many investors may be wondering if the domestic equity market has any steam left or if we’re in store for a lackluster 2020. There is, of course, no way to be certain what the next year holds; however, it is worth noting that just looking at the calendar year return of the S&P may not give us the full picture.
On December 31, 2019, SPX closed at 3230.78, which is only about 11% above the peak of 2,940.91 it reached in September 2018. The index was down 13.97% in 4Q18, reaching its low point on December 26
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after the “Christmas Eve Massacre,” only days before the start of 2019. The timing of these events set up circumstances favorable for a strong showing for calendar year 2019. However, a significant portion of the S&P’s 2019 return was regaining ground it had lost in 2018. In fact, it wasn’t until May that SPX eclipsed its previous high watermark. So, while 2019’s gains may look gaudy on the surface, it’s worth bearing in mind how we got there.
The strong performance of US equities was not the only notable event for the financial markets in 2019. Heading into the year, there were widespread expectations for higher domestic interest rates and there were few, if any, analysts that weren’t projecting higher rates by the end of the year. However, these expectations did not come to fruition as US interest rates declined throughout much of the year. The falling rate environment provided a tailwind for fixed income investors and the Bloomberg Barclays U.S. Aggregate Bond Index recorded a total return of 8.72% for the year. In the final months of the year, the market reversed course as domestic rates began to rise, tempering what was otherwise a very bullish year for bonds. In the final quarter of the year, the U.S. aggregate index was relatively flat, notching a total return of just 0.18%
International equities also had a strong showing in 2019. However, both international developed and emerging market equities lagged the performance of the S&P 500. Developed markets outpaced emerging markets as the MSCI EAFE Index gained 18.44% on a price return basis, compared to a 15.43% return for the MSCI Emerging Markets Index. The strong performance of international equities comes on the heels of a dismal 2018. Both developed and emerging market equities declined more than 16% in 2018, while the S&P 500 lost a little more than 6%, making international’s relative underperformance in 2019 even starker.
As we begin 2020, US equities remains the top-ranked asset class in our Dynamic Asset Level Investing (DALI) tool. DALI provides us with a heat map of where relative strength (and weakness) resides across and within asset classes. From a sector perspective, technology continues to lead the pack within domestic equities, followed by industrials and financials. Meanwhile, from a style perspective we continue to see leadership from growth as large-, mid-, and small-cap growth are the top-ranked size & style categories.
As always, we continue to monitor your portfolios, and stand ready to make any necessary changes as leadership changes within the market. If you would like to become more familiar with my investment process and the tools I use to identify market leadership across major asset classes and within asset classes, please contact me at your convenience.
Sincerely,
David M. Gallagher
Wealth Manager
Source: Dorsey Wright
The performance numbers in this article do not reflect transaction costs. Indexes are not available for direct investment. Past performance is not indicative of future results and there is no assurance that any forecasts mentioned in this report will be attained.
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