Volatile markets, recession fears, trade war rhetoric, flagging manufacturing, and rising interest rates were on the minds of investors as we entered 2019. We had just seen a market rout in December and some investors were starting to head for the hills. But then to keep investors on their toes, some of these issues turned around abruptly and economic headwinds became tailwinds.
This shift in outlook led to an impressive year for stocks that continued during the 4th quarter (Q4). Here’s a roundup of how major markets performed in Q4 and for the year, respectively:
- Large Cap Stocks – up 8.6% and 31%
- Small Cap Stocks – up 10% and 26%
- Developed Foreign Markets – up 7.4% and 22%
- Emerging Markets – up 11.3% and 17%
- Core Bonds – flat during Q4 and up 8.6%
Stocks behaved so poorly so quickly in late-2018, that a turnaround was to be expected. The S&P 500, a common benchmark for the US stock market, had declined almost 20%. But the turn of the year was almost like flipping a switch. Stocks surged in January, up almost 8% that month alone and were ultimately up ten months out of twelve in 2019.
Individual investors had been decidedly bearish but eventually began to turn more optimistic. While still far from being exuberantly bullish, investors showed more interest in stocks as the year progressed. Positive headlines about our trade dispute with China helped with this in Q4, even though no major deal was agreed to.
The Fed helped to juice up returns with three rate cuts during the year. The rate-setting body reversed its “hawkish” tone and indicated it won’t raise rates until inflation is significant and persistent. That could be awhile.
Manufacturing weakness, both at home and abroad, has been a growing problem. The Institute for Supply Management tracks this and reported softening manufacturing numbers throughout 2019. A score below 50 indicates a recession in the sector and manufacturing is at about 47 while non-manufacturing is at about 53. Low interest rates help stimulate activity, but continued trade uncertainty limits it since much of the manufacturing sector is impacted, directly or indirectly, by tariff concerns.
Service sectors, such as Tech and Financial Services, helped pick up the slack and saw stock prices rise 49% and 32%, respectively. Even the worst performing sector, Energy, a perennial laggard, still turned in a respectable 10% for the year.
The yield curve inverted during 2019. This was important at the time because inversions are a closely watched recession indicator. But the Fed’s abrupt rate shift helped un-invert the yield curve. This fueled stock price performance as investors took solace in a reduced likelihood of near-term recession.
The bond market had been performing well heading into late summer, with core bonds up about 9%. So many investors bought bonds that the yield on the 10yr Treasury, a key indicator, declined to a historically low 1.5%, down from about 3% a year earlier (declining yields mean higher prices). But then the Fed lowered rates in August, September, and October, and the bond market limped along for the rest of the year.
The Fed’s rate reductions were a self-declared preemptive move to push off recession. This is good in the short-term but won’t work forever. We’re late in the economic cycle and a recession of some depth will begin eventually. Accordingly, expectations are for positive but muted stock and bond returns as we enter the new decade.
Should stocks continue higher my plan would be to keep taking profits in your portfolio via the rebalancing process. From a practical standpoint, it’s best to look ahead and think about any larger cash needs you have coming up that strong market performance can help cover. If there aren’t any, some of your profits can go into high quality bonds.
As an interesting sidebar, the SECURE Act is now law. Among many other things, the Act increases the age when you must start drawing from your IRA from 70.5 to 72. This only helps those turning 70.5 during 2020 and beyond. This is good news and a needed update. The bad news is that IRA beneficiaries (who aren’t surviving spouses) can no longer “stretch” their distributions over their life expectancy. They’ll have to clean out the inherited account within ten years and pay taxes at a faster rate than otherwise necessary.
Please feel free to ask questions about this new law.
Have questions? Ask me. I can help.
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