4Q 2019 Market Summary
2019 was clearly a strong year for all asset classes. The strong returns were at least partly due to an advantageous starting point, as the market sold off precipitously just before the start of 2019. The S&P 500 Index now trades at a forward price-to-earnings ratio of just over 18x forward earnings, compared to a historical average around 16x, indicating that stock prices are now less attractive. And while non-U.S. stocks appear cheap relative to domestic equities, non-U.S. stocks are also trading at a premium to their historical average. Equity market gains were driven more by multiple expansion than earnings growth, suggesting optimism about future growth but also setting investors up for disappointment if that growth does not materialize. Given that the U.S. economy is now 126 months into the longest period of economic expansion in U.S. history, a cautious approach is the prudent course for investors.
Investors should also maintain lower expectations for bond markets going forward, given that interest rates are now much lower than in early 2019. Negative yields are still persistent in other parts of the world with $12 trillion in debt trading with negative yields; however, betting on a similar outcomes in the U.S. involves the expectation of continued irrational behavior by bond investors. In our opinion, bond markets are not currently pricing in any likelihood of higher rates, meaning that significant risk remains in bonds. Investors should avoid the temptation to reach for yield and instead focus on capital preservation.
The capital markets ended 2019 on a positive note, with most key sectors and asset classes posting positive returns during the fourth quarter. The S&P 500 Index returned an impressive 9.1% during the quarter, resulting in a total return of 31.5% during the full year 2019. The healthcare and technology sectors were the leading contributors to the strong S&P 500 during the quarter, as those sectors each rose 14.4%. For the year, technology stocks returned a staggering 50%. Utilities barely squeaked out a positive return of 0.8% during the quarter, while real estate stocks lost 0.5% during the quarter, as rising interest rates hurt both rate-sensitive sectors.
Strong performance from the technology sector helped the Russell 1000 Growth Index generate a 10.6% return during the quarter compared to 7.4% for the Russell 1000 Value Index. Small cap stocks performed in line with large caps during the most recent quarter, with the Russell 2000 Index (small cap) returning 9.9% in the quarter. That said, small caps lagged larger stocks for the full year as the Russell 2000 Index returned 25.5% for the year. Non-U.S. stocks posted strong absolute returns for the year but lagged the S&P 500 Index. The MSCI EAFE Index returned 8.2% and 22% for the fourth quarter and 2019, respectively. Emerging markets beat the S&P 500 Index during the quarter with a return of 11.8%, finishing 2019 at 18.4%.
Fixed income markets experienced a quiet fourth quarter, but 2019 was a remarkable year for bonds overall. The Federal Reserve lowered its key federal funds rate to a range between 1.5% -1.75% causing short term rates to decline slightly. While the Fed lowered its short term fed funds rate, longer term rates rose during the quarter likely due to optimism about future economic growth. Ten-year treasury rates rose from 1.68% to 1.9% during the quarter, but are down from just under 3% at the start of last year.
The Bloomberg Barclays U.S. Aggregate Bond Index gained only 0.18% during the quarter, but rose 8.7% for the year, thanks to declining interest rates and a corresponding rise in bond prices through most of the year. The 2019 return reflects the best calendar year returns for the widely followed bond index since 2002. Corporate bonds benefitted immensely from increased economic optimism, as the Bloomberg Barclays U.S. Corporate Bond Index returned 1.2% during the quarter, while high yield bonds returned 2.6%. Investment grade corporate bonds and high yield bonds both generated returns near 14.5% for the year, thanks to a combination of increased economic optimism and lower interest rates. Municipal bonds returned 0.7% during the fourth quarter and 7.5% for all of 2019.
The Bloomberg Commodity Index grew 4.2% during the fourth quarter and 7.7% for the year. The LBMA Gold Price Index returned 2.4% during the quarter and 18.8% for 2019. Oil prices rose during the quarter from around $54 per barrel of WTI Intermediate Crude oil to end the year around just over $61.