2019 Fourth Quarter Review

The Fourth Quarter Was A Pleasant Walk In The Park For Equity Markets

In fact, 2019’s fourth quarter was the exact opposite of 2018’s fourth quarter. The trading range that had contained major market indexes for the previous six months was broken to the upside in October. November gave the S&P 500 Index a gentle +3.39% ride higher. After a very short speed bump the first two trading days of December, it continued the gentle ride for another +2.87%. By the end of the fourth quarter the S&P 500 Index had a total return of +9.07%. It finished the year with a gain of +31.49% and was one of the top performing equity indexes of the year. Other equity indexes rallied in support of this large cap standard bearer, and there were multiple break-outs to the upside in December, both in domestic equities and in international equities.

2019’s Yearly Numbers Were Boosted By The First Quarter Super-Bounce

We need to remember that the first quarter of 2019 contained nearly all of the rebound action from 2018’s fourth quarter decline. For the S&P 500, that amounted to +328 points, or +13.08%. Subtract that from the annual total return number and you still get a very respectable +18.41% for the S&P 500 Index. If you want to smooth out the returns for the S&P 500 Index even farther, we can look at the rolling 3-year return for 2017 through 2019, which is still a very acceptable +15.28%.  Last but not least, the total return for the S&P 500 Index going back to 1950 is +11.44% annualized, which is why long-term investors like investing in stocks.

International EquitiesAlso Enjoyed A Favorable Fourth Quarter

Developed international equity markets became coordinated with U.S. equity markets while both were in their trading ranges. When U.S. equities broke out to the upside in October, developed international equities were with them hand in hand. As a reminder, developed international equity markets include Canada, Western Europe, and Japan, with the remainder of the international equity markets labeled as emerging markets. Emerging markets, dominated by the big four, China, Russia, India and Brazil, held back until December before breaking out to the upside. Promising developments associated with the China-U.S. trade talks received partial credit, but a broader reality is that a broad, global bull market has taken hold.

Bond Markets Were Not Intimidated By Equity Market Action

Rather, bond markets settled into a comfortable trading range in the fourth quarter after enjoying a very respectable advance the first nine months of 2019. The Bloomberg Barclays U.S. Aggregate Bond Index was up +0.18% in the fourth quarter and gained +8.72% in 2019. The Bloomberg Barclays Municipal Bond Index was up +0.74% in the quarter and gained +7.54% for the year. High yield bonds continued to produce the best results, with the Bloomberg  Barclays U.S. Corporate High Yield Bond Index up +2.61% for the quarter, and up +14.32% for the year.  

The Economy Forecasts Another Strong Year But There Are Plenty Of Wild Cards In The Deck

Low interest rates, unemployment rates, inflation rates, and tax rates, coupled with steady consumer spending and corporate profitability, would appear to give the economy and the stock market a pat hand. The unpredictable parts reside with four Wild Cards and the Dealer. Wild Card 1. Ongoing Washington DC impeachment/scandal developments. Wild Card 2. The Presidential election, although historically stock markets tend to trend higher regardless of which party wins. Wild Card 3. China-U.S. tariff talks and Middle East tensions. Wild Card 4. High-speed algo-trade risk, such as 2018’s fourth quarter. The Dealer is our news services, which have a decided bias in determining not only what, but when and how news is shared. In our view, regardless of what happens minute by minute on the floor, in the long run and usually in the short run, the House wins. The Market is the House.

Edward D. Foy

Manager, SELECTOR® Money Management

© 2020 Edward D. Foy. Sources: Bloomberg, Standard and Poor’s, Morningstar, StockCharts.