Market Returns: Global stocks delivered very strong returns in the fourth quarter which led to exceptional performance for stocks in 2019. The tensions brought by the trade war between the U.S and China looked to be easing late in the year which ignited a strong rally in global equities. The brighter outlook on the trade front was particularly helpful for emerging market stocks given the weight Chinese shares have in the emerging markets. Developed international market stocks also experienced very good performance in the fourth quarter, as well as for the year, as the British reelection of Boris Johnson as Prime Minister provided far greater certainty regarding the issue of Brexit. U.S. bonds delivered unexpectedly strong returns for 2019 as prices rose in the year’s first half on expectations for Fed rate cuts, along with a safe haven bid from the stock market losses experienced in 2018’s fourth quarter. The Fed obliged by cutting rates by a quarter of one percent three times in the second half of the year, in turn stoking stock prices. With the Fed signaling that they are finished for the time being, U.S. bonds produced modest returns in the fourth quarter. Global bonds also delivered strong returns in 2019, albeit with slightly negative returns in the fourth quarter as investors rotated out of bonds into stocks given the brighter outlook.
U.S. Economy: In considering the U.S. economy, one can certainly characterize it as a “Goldilocks” economy – not too hot and not too cold. Year-over-year GDP growth came in at 2.1% in the third quarter of 2019, which while below the historical average, is still positive and not unexpected based on prior year forecasts. The resiliency of the consumer is notable even with the benefits of the 2017 tax cuts having made their way through the economy. Not unexpectedly, one of the largest drags on GDP growth last year came from exports where the effects from the U.S. China trade impasse showed up. Unemployment remains historically low at 3.5% and wage growth has continued to pick up slightly to 3.7 percent. So far, inflation has also been contained although pressures could build as slow labor force growth could continue to put downward pressure on the unemployment rate and upward pressure on wages. Earnings growth has slowed and may continue to slow with expectations for mid-single digits growth this year. With modest GDP growth, historically low unemployment, inflation seemingly in check, and positive expected earnings growth, this steady economic environment can continue to provide a positive backdrop for gains in U.S. stocks, in spite of higher than average stock valuations.
Global Growth Forecasts: The World Bank released their growth forecasts for 2020 which indicates that while global growth is expected to pick up from 2.4% to 2.5% in 2020, the driver of this gain comes from the developing markets. Growth in the developed markets, including the U.S., is expected to decline as the bank expects slower recovery in trade and investment. The bank was also concerned with mounting geopolitical risks, which have escalated at the start of the year with the tensions between the U.S. and Iran. We have always maintained that having a globally diversified portfolio is important, especially considering expectations for growth going forward. While it is difficult to forecast returns year-to-year, when considering both growth and valuations, the emerging markets offer a compelling investment case over the longer term.
Conclusion: While the U.S. is in decent shape economically, we expect that returns for U.S. stocks in 2020 are likely to be more muted coming off such a strong year last year. While trade tensions have improved, geopolitical risks have recently mounted, which could contribute to keeping a lid on returns depending on how this develops. It is also likely that we will know the Democratic candidate for U.S. President by mid-March which could also impact markets. We will keep you informed of any important developments and communicate any portfolio implications we see.
We start the new year in our new Menlo Park office, and we’re all excited about our new space! We hope to see you at our new office sometime in the future. Have a happy and healthy 2020!
It is not possible to invest directly in an index.