The year 2019 was by all measures a great year for investors, although few people predicted the kind of returns that both the stock and bond market produced. We began the year with the market pundits worrying about trade issues and the possibility of global slow-down and even a potential recession. Well, investors that stayed on the sidelines because of these concerns clearly missed out on one of the best years in over 20 years. There was not a global recession or a resulting bear market. In fact, we did not even have a 10% intra-year decline. The largest drawdown during the year was less than 7%. What we did have was a market melt-up. All year the talking heads on TV were preaching doom and gloom (trade wars, impeachment, inverted yield curves, impending recession, etc.) and the market just kept going up. The S&P 500 finished up 31% in 2019. The tech-heavy Nasdaq Composite finished up more than 36%. The S&P Midcap 400 and the Russell 2000 (Small cap) finished up 26% and 25.5%, respectively. The MSCI EAFE Index (developed Europe & Asia) finished the year up 22% and the MSCI Emerging Markets Index was the only major equity index to finish below 20% with an 18% return. The top performing sectors in 2019 were technology, communication services and financials. The worst performing sectors were energy, healthcare and materials. As good as the stock market returns were in 2019, we believe the returns in the bond market were an even greater surprise to the upside. We began the year with the 10 Year US Treasury at 2.69% and the yield on the US Aggregate Bond Index at 3.3%. Once Fed Chair Powell indicated in early January 2019 that the Federal Reserve (“Fed”) was done hiking rates, interest rates began to fall across the yield curve. The Fed not only stopped raising rates but actually cut the federal funds rate three times over the course of 2019. The 10 Year Treasury fell all the way to 1.47% as of September. Yields moved back up slightly over the rest of the year and the 10 Year Treasury finished 2019 at 1.92%, still down 28% for the year. The US Aggregate Bond Index yield finished 2019 at 2.3%, down 30% for the year. As a result, all major bond indices finished with strong returns. The Bloomberg Barclays US Aggregate Index finished up 8.7% and the Bloomberg Barclays Muni Index finished up 7.5%. The BAML US High Yield Index finished up 14% and the S&P Leveraged Loan (Floating Bank Loans) Index finished up 8%.
The economy continued to expand in 2019 with GDP expected to come in at about 2%, albeit at a slower pace than the 3% in 2018. Unemployment continued its downward trend and was below 4% by the end of the year. Inflation as measured by CPI came in under 2%. None of these factors point to an imminent recession, and although we don’t see a repeat of 2019 in 2020, we also do not have a bear market as our base case scenario. More likely than not we believe 2020 will be a year where fixed income clips its coupons and yields don’t move all that much. We also find it likely that the stock market will be more volatile than it was in 2019 but not necessarily a negative year. Low to high single digit returns seem to make sense as the base case scenario, not all that bad after a 30% equity return year.
Tom Reynolds, CPA & Matt Reynolds CPA, CFP®
Gordon Shearer Jr., CFP®
Robert T. Martin, CFA, CFP®
Jeff Hilliard, CFP®, CRPC
Francis C. Thomas CPA, PFS
(This article is for informational and educational purposes only and should not be relied upon as the basis for an investment decision. Consult your financial adviser, as well as your tax and/or legal advisers, regarding your personal circumstances before making investment decisions.)