Winter 2020 Market Commentary

Steve Lear |

By Marc Usem

“It’s the way the human brain works: when enough events occur in a pattern, we stop thinking and go into macro mode.” N. K. Jemisin

What a difference a year makes! A year ago, the markets were in panic mode and had suffered a decline of nearly 20%, the low point being December 24th. At that time, the Federal Reserve indicated that it was continuing its policy of raising interest rates, trade with China was in tatters, and the general consensus was that a recession was looming. As we all know, with 20/20 hindsight, 2019 turned out quite different from investors’ expectations in late 2018. Once again the U.S. was the world leader in this year’s stock market rally with a 31.5% return. Large stocks continued to outperform smaller stocks and among stock sectors, technology continued to lead the pack. In fact, just five tech stocks accounted for 25% of the S&P 500 Index returns. International stocks lagged domestic shares but still had a strong performance with the MSCI ACWI Ex U.S. Index gaining 17%. Another surprise in 2019 was the strength of the U.S. bond market. Rates fell to record lows and bond returns soared during the year. The Aggregate Bond Index gained 5.9% and long-term treasury bonds ended the year up 11.5% after a peak mid-year return of more than 20%.

Investment performance during 2019 was largely due to a 180 degree turnaround by the Federal Reserve in late January. Instead of increasing interest rates as originally stated, the Federal Reserve reversed course and decreased interest rates three times by a total of 0.75%. In addition, the Federal Reserve reversed its balance sheet reduction program in September of 2019 and repurchased about half of the prior year’s decrease, focusing more on adding shorter-term maturities, particularly overnight loans. This created a significant increase in money supply and added liquidity to buy into the market. In addition, markets found support as progress on trade with China was made during the year including a “Phase One” trade deal with China that was announced near year end. As fears of a recession abated, markets continued to rise in the fourth quarter with the S&P 500 gaining 10.42%, and international markets closely following with an 8.32% increase. Bonds were mostly flat during the quarter, but long-term bonds fell 4.70% as yields began to rise.

Even though stock market performance in 2019 was one of the best in more than 20 years, we started from a low base following the plunge in late 2018. At current market highs, valuation remains reasonable on some measures. For example, the stock prices for the S&P 500 are roughly 24 times earnings, about the same as they were on January 1, 2018. While current stock valuations are high by historical standards, we need to look at them in light of where interest rates are today. With 10-year Treasury bonds yielding 1.9%, near record lows, stock valuations do not look too out of line. However, we would note that higher stock valuations can also create greater fragility in the markets. Valuation provides some perspective, but it is an imprecise measure. Over time, market prices are driven by a combination of fundamentals and momentum. Markets can continue to move higher as fundamentals catch up to prices. We would caution investors to not get accustomed to these types of returns going forward — particularly in a world where we expect slower-than-average economic growth.

To hear more about the state of the economy and our expectations for the upcoming year, we invite you to attend our 2020 Market Forecast Presentation, which will be held Monday, January 27th. For more information and to register, please visit

Thank you for your continued confidence in our work.

The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Past performance is no guarantee of future results. To discuss any matters in more detail, please contact your financial advisor.