Despite a gloomy outlook at the onset of the year, 2019 proved to be a stellar year for investments and a strong year for the economy of the United States. Following a frightful fourth quarter in 2018 that saw the S&P 500 drop 13.53% and the Dow Jones Industrial Average lose 11.8%, investors had little to be optimistic about as the calendar turned to 2019. A GDP measure of 2.2% in the fourth quarter fell short of the President’s and some economists’ goals, adding further to the malaise and investors’ unease.
A myriad of concerns including China’s slowing economy, slowing GDP growth, flattening bond yield curves, and economic trade wars loomed over the economic horizon in early 2019. Despite these concerns, 2019 would go on to see the U.S. economy establish a new record for the longest period of economic expansion, eclipsing the economic expansion that lasted from 1991 until 2001.
During the record-breaking year, unemployment began the year at 4.0%, and dropped to 3.5% by year-end. Wage increases, although softer than some economists hoped for, registered 3.0% for all workers in 2019. While wage growth was softer than hoped for, inflation continued to be tame in 2019. According to the Bureau of Labor Statistics, inflation remained moderate at 2.3% in 2019.
Buoyed by strong employment and tepid inflation, the U.S. economy experienced GDP growths of 3.1% in the first quarter of 2019. GDP measures cooled slightly the rest of the year, growing at a 2.0% rate in the second quarter and 2.1% in the third quarter.
A Great Year for Equities
Reversing the course set in the fourth quarter of 2018, domestic stocks raced to a strong start in the first quarter of 2019. Although stocks stalled and trod water in the second and third quarters of the year, the fourth quarter of 2019 saw strong growth to end a strong year for domestic equity markets. In fact, U.S. equity markets experienced their best performance year since 2013, setting over twenty record highs along the way.
In the U.S. large cap stocks outperformed small cap stocks. The S&P 500 index grew at 31.49% in 2019, including dividends, while the Russell 2000 index grew at 25.52%. By comparison, the Dow Jones Industrial Average returned 25.09% in 2019. Real estate had a strong year as well, as the Dow Jones US Select REIT Index grew at 23.10% in 2019. Bonds had a strong year, return-wise, thanks to Federal Reserve interest rate cuts. In response to the three rate cuts by the Federal Reserve, the price of domestic bonds increased to help the Bloomberg Barclays US Aggregate Bond Index realize a 8.72% gain.
2019 was a strong year for overseas equities as well. Although the US outperformed international equities in 2019, international and emerging market stocks had their best years in some time. International developed stock markets (Europe, Japan, Australia, etc.) saw large cap stocks return 22.49%. Unlike the US market, however, small cap stocks outperformed large cap stocks in international developed markets, returning 25.41% in 2019. Emerging markets (Greece, Egypt, India, etc.) experienced strong returns as well in 2019, but lagged both developed international and US equities. Large cap emerging markets stocks returned 18.42% for 2019, while small cap emerging markets stocks produced a 11.50% return. Global REITs narrowly edged out US REITs by returning 23.59% to 23.10% for US REITs.
Greece’s equity market index had the highest return of all markets in 2019, earning 55.76%. Argentina’s equity market had the poorest returns, losing 18.04% in 2019. As strong as the US equity markets performed in 2019, the US market return was only the ninth-best in the world, trailing Greece, Russia, Taiwan, Switzerland, the Netherlands, Columbia, Ireland and New Zealand.
Looking Ahead to 2020
Twelve years is an extraordinarily long time for cycles of economic expansion and bull market returns in US equities. We know the growth cannot continue forever, but the record-setting pace of the economy and stock market do not show many signs of weakness. Throw in a Presidential election year wildcard to boot, and the outlook for 2020 becomes even murkier.
The last Presidential election year of 2016 should serve as a cautionary tale, however, that the pundits frequently miss wildly with their predictions. Maintaining a disciplined investment strategy based on each investor’s risk tolerance and time horizon is the most surefire way to reaching financial goals, regardless of the economic and investment market conditions that arise.
Sources: Dimensional Fund Advisors LP, Ibbotson Associates, The Wall Street Journal