Domestic equity markets posted strong gains
during the fourth quarter of 2019 with the S&P 500 Index increasing 9.07%.
Market volatility was minimal in the quarter with major domestic indices
continuing to reach all-time highs through December on the back of an
accommodative Federal Reserve and a Phase One trade deal with China. The
S&P 500 Index returned 31.49% over the course of year – the best yearly
gain since 2013.
Equity performance was also strong across
small- and mid-cap companies with the Russell 2000 Index and Russell Midcap
Index returning 25.52% and 30.54%, respectively. Growth stocks once again
outperformed their value counterparts across all market capitalizations. Except
for the Real Estate sector’s -0.5% decline, all sectors were positive in the
quarter. Technology continued its strong run, returning 14.4% in the quarter
and 50.3% for the calendar year 2019. The Healthcare sector rebounded in the
quarter returning 14.4%. High dividend paying defensive sectors like Utilities
and Consumer Staples lagged the overall market as bond yields rose to become
more attractive and risk-on sentiment thrived.
Equity markets outside of the U.S. posted
strong gains in the fourth quarter with Emerging Markets leading the way with
an 11.84% return. Chinese markets were a major driver of Emerging Market
returns as positive news flow of a trade deal with the U.S. calmed investors. A
decisive Conservative Party victory in Britain’s Parliamentary elections led to
a strong rally in UK equity markets as investors saw a pathway forward to a
final Brexit deal. Developed European markets moved higher on continued
European Central Bank accommodation and hopes that major manufacturing centers
were bottoming.
The Federal Open Market Committee (“FOMC”)
cut interest rates by 25 basis points at their October meeting, leaving the
target range for the federal funds rate at 1.50% to 1.75%. Fed Chairman Jerome
Powell cited sluggish global weakness, the U.S.- China trade war, and
uncertainties associated with Brexit as reasons for the additional rate cut,
noting that inflation was not currently a concern. Chairman Powell also
signaled this may be the final rate cut in this “mid-cycle adjustment” and
stated the FOMC’s current rate stance of monetary policy was likely to remain
appropriate. The yield on the 10-year Treasury rose from 1.68% to finish the
quarter at 1.92%. The yield curve steepened as the FOMC’s rate cuts lowered the
short end of the curve, and recessionary concerns for 2020 abated allowing
longer-term rates to steadily rise.
The initial estimate of fourth quarter gross
domestic product (GDP) was for 2.1% growth, bringing 2019 calendar year growth
to 2.3%. Residential fixed investment, representing purchases of private
residential structures and equipment, was the bright spot in the report and
grew at a 5.8% pace. Personal consumption expenditures slowed but still grew by
1.8%, government spending was additive, and trade provided its biggest
contribution to GDP in a decade as imports collapsed. One concern in the report
was the negative contribution from business investment, which declined for the
third straight quarter. Consumer confidence indices remained high but did tick
down in December after a strong November reading.
The U.S. unemployment rate remained at 3.5%
during the fourth quarter – its lowest level in 50 years. U.S. hiring picked up
with the economy adding an average of 184,000 jobs per month during the
quarter. The December Jobs Report saw continued increases in employment in the
service sectors, especially education and health services, which is a trend
that was present throughout the year. Average hourly wages continued to grow
near a 3% rate throughout the quarter.
The year-over-year headline inflation rate
increased to 2.3% during the quarter, with higher gasoline prices more than
offsetting declines in used automobile prices and airline fares. During the
same period, core inflation, which excludes food and energy, rose at a 2.3%
rate with upward pressure in shelter and medical care services.
