The 2019 edition of the financial markets digest is now complete – and what a year it was!
US stocks and bonds, global stocks, gold, and commodities (including crude oil) all posted strong gains as Mr. Market rewarded the US economy’s resilience to trade tensions. An unexpected dovish turn by the Federal Reserve in May sent already low interest rates on a drastic decline rarely seen absent a slumping economy, adding further support to global equity markets.
The highly volatile fourth quarter of 2018 bottomed out on Christmas Eve, and equity traders were in full buying mode as the calendar turned to 2019. While the majority of 2019 gains came in the first quarter, US stocks moved higher in all four quarters with a notable surge in momentum to close out the year. Unlike the previous two years, all twelve economic sectors shared in the market’s gains – although the high-flying technology sector once again set the pace, rising a whopping 50.3% compared to the S&P 500 index price-only gain of 28.9%
But the stock market wasn’t the only place for investors to profit in 2019. The Bloomberg Barclays Aggregate Bond Index gained 8.7% as bond traders pushed the 2-year, 10-year, and 30-year US Treasury bond yields sharply lower over the spring and summer. At the extremes, 2-year yields moved higher than 10-year yields, temporarily “inverting” the yield curve and triggering speculation of oncoming recession. But no such inversion occurred in the US Corporate bond market, where investment grade issues gained 14.5% and high yield (junk) bonds posted a 14.4% return.
Meanwhile, the oft-struggling equity markets outside the US enjoyed very solid gains of their own, with the MSCI EAFE index of developed markets and the MSCI EM emerging markets indices gaining 18.4% and 15.4% respectively. Precious metals moved higher, with gold gaining 18.8% and silver rising 15.3%. Even copper, a proxy for industrial commodities, rallied to gain 6.3% despite persistent concerns about slowing global economic growth.
Across-the-board gains of the magnitude seen this past year are refreshing, but in years like 2019 capturing the full measure of market returns is only possible by disregarding risk. The S&P 500 price return for the 15-month period ending December 31, 2019 is just 10.97% - far less than its 12-month gain of 28.9% - thanks to the fourth quarter of 2018. This underscores the need for investors to not grow complacent.
Investment strategies that we employ at Compass Financial seek results in line with the levels of risk assumed in our portfolios. FOMO – fear of missing out – can lead investors to ignore risk. As we enter 2020, embrace the fundamental proposition of risk management: “Occasional disappointment is the price one pays to avoid ruin.”
by Steve Conard, CFP®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds. The MSCIEAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCIEAFE Index consists of the following developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK. The MSCIEM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCIEM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa.Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.