2019 turned out to be a good year for the U.S. economy and an excellent one for investment returns with stocks bouncing back from a difficult 2018. From the beginning of the year, January’s rally helped set the tone in which the market responded to every downturn with a more sustained upswing. Along the way, stocks kept setting records – 35 of them for the S&P 500 Index, 22 for the Dow Jones Industrial Index and 31 for the Nasdaq. Despite the somewhat softer tone of the last few trading sessions of the year, the major market indexes ended 2019 with advances of 25.34% for the Dow Jones Industrial Average, 31.48% for the S&P 500 and a whopping 36.74% for the Nasdaq. For the fourth quarter, U.S. large caps outperformed small caps while value marginally outperformed growth. All the sectors of our domestic economy posted double-digit returns, with growth sectors such as technology and health care outperforming cyclical (industrials, energy, materials) and defensive, rate-sensitive sectors (staples, utilities, real estate).
International stocks once again lagged behind U.S. equities in 2019, in part because of a stronger U.S. dollar and some investor caution regarding the potential impact of a trade war on corporate profits overseas. However, we believe that it is still important for investors to have an asset allocation including international equities. In the long run, slowing growth in the U.S. and a rising trade deficit could cause the dollar to fall, amplifying the return on international equities.
The fixed income market surprised many in 2019 by rallying for much of the year as the Barclays U.S. Aggregate Bond Index rose by 8.72 %. In 2018, most believed the Federal Reserve (Fed) would continue to tighten monetary policy by raising its benchmark interest rate. However, the Fed reversed its approach, turning from tightening in 2018 to easing and cut its benchmark interest rate by 25 basis points three times in 2019. This brought short-term interest rates down relative to long-term rates, consequently returning the briefly inverted yield curve to a positive slope, thus easing recession fears.
The U.S. economic cycle continued to mature in 2019. A healthy labor market, low unemployment and modestly accelerating wage growth supported personal consumption, and consumer strength partly offset slight weakening in the production side of our domestic economy. The U.S. economy has downshifted to 2% from 3% growth over the past year, mirroring the slowing global expansion. We expect neither a sharp acceleration nor a further economic slowdown in 2020. Rather, we see another year of around 2% growth as the most likely outcome.
The past decade greatly rewarded investors who put their money into the broad markets. Domestic equities produced close to double-digit average annual returns over the last ten years while bonds also generated solid results. In both cases, the hard to beat, stellar performance of the last decade has been accompanied by rising valuations, setting up returns to be somewhat lower in the 2020s.
Looking ahead, there are still some risks to consider. Among them is the unique timing of the U.S. presidential election as it may coincide with some potential economic weakness in the second half of 2020. Combined with concerns about a possible change in tax policy and tighter business regulation should the White House flip, these conditions could lead to some market volatility in the second half of 2020. However, we encourage our clients to try to keep their emotions about politics in check when it comes to their investments and remember that the economy is the primary driver of market performance, not Washington. The outlook for 2020 is shaping up as, hopefully, unexciting steady-state growth in many advanced economies. The trade tensions seemed to have subsided, the Iran war drums have hushed at least for now and we believe the extraordinary bull market that started in March 2009 is still alive and well.
Dumont & Blake Investment Advisors, LLC
December 31, 2019