January 2020 – 

December 2019 Market Update


2019 was an exceptional year for investing. Every major asset class delivered extraordinary returns. U.S. stocks led the way with a 31.0% total return for the year. Foreign developed and emerging market stocks followed with 22.0% and 18.4% returns. U.S. bonds returned 8.7%, more than four times the inflation rate. Foreign bonds returned 4.6% and cash returned 2.3%.  2019 returns for every major asset class exceeded their three- and five-year average returns.  On nearly any measure, returns were clearly above average.

Entering 2019, markets were jittery with recession fears high. Stocks had just declined by nearly 10% in December of 2018. The U.S. Federal Reserve (“Fed”) raised rates four times in 2018 and projected at least two more rate hikes in 2019. The Fed’s intent to raise rates did not sit well with investors who were concerned that the economy was starting to contract. Further rate hikes could push the economy into recession.



















By July 2019, the Fed had reversed course and cut interest rates for the first time since 2008. This was a rather extraordinary change in expectations. The Federal Reserve followed with two more rate cuts. By year-end the Fed, clearly changing their tune, had cut rates three times (to the delight of investors).  Buoyed by a stimulative monetary policy and signs of a slow but stabilizing economy, investors bid up stock and bond prices. “Do not fight the fed” proved to be the investor mantra for 2019.

Do strong stock returns in 2019 mean low or negative stock returns for 2020? Using history as a guide, there is little correlation between prior year stock returns and stock returns for the coming year. As shown in the chart, there is no clear relationship between a prior year’s stock returns (x-axis) and the next year’s stock returns (y-axis).
















Since 1928 there are many instances where stocks followed on strong prior year returns with another strong year, and many instances where it did not. We do believe earnings growth needs to accelerate to support stock valuations. However, a slow-growth economy with low interest rates and limited yield alternatives has supported stock valuations historically.


Ultimately, forecasting next year’s stock returns or next year’s interest rates is challenging if not impossible to do with any accuracy or consistency. Just ask the Federal Reserve.