Strong December caps off terrific year for markets
Markets experienced solid gains in December, capping off an impressive quarter and year. The S&P 500 returned 3.02 percent, the Dow Jones Industrial Average (DJIA) gained 1.87 percent, and the Nasdaq Composite rose 3.63 percent. This positive performance led to a quarterly gain of 9.07 percent for the S&P 500, 6.67 percent for the DJIA, and 12.47 percent for the Nasdaq. The annual figures are even more impressive, with the S&P returning 31.49 percent and the DJIA and Nasdaq growing by 25.34 percent and 36.69 percent, respectively.
This strong performance came despite weak fundamentals. Per Bloomberg Intelligence, earnings for the S&P 500 fell by 1.2 percent during the third quarter. Analysts expect earnings to decline in the fourth quarter before returning to growth in 2020. On a technical level, all three indices spent the month and quarter above their respective 200-day moving averages.
International markets also had a strong December, quarter, and year. The MSCI EAFE Index gained 3.25 percent for the month, 8.17 percent for the quarter, and 22.01 percent for the year. The MSCI Emerging Markets Index gained 7.53 percent for the month, 11.93 percent for the quarter, and 18.90 percent for the year. From a technical perspective, both the developed and emerging market indices spent November and December comfortably above their 200-day trend lines.
Fixed income had a more challenging month. The 10-year Treasury yield ended November at 1.78 percent and fell to 1.72 percent before finishing December at 1.92 percent. This led the Bloomberg Barclays U.S. Aggregate Bond Index to fall by 0.07 percent for the month, though it gained 0.18 percent for the quarter and 8.72 percent for the year.
The Bloomberg Barclays U.S. Corporate High Yield Index returned 2 percent in December, leading to a quarterly gain of 2.61 percent and an annual return of 14.32 percent. High-yield spreads tightened, falling from 5.35 percent in January to 3.60 percent in December.
Economic growth continues
December’s economic updates painted a picture of steady growth. Third-quarter gross domestic product (GDP) showed an annualized growth rate of 2.1 percent, which helped calm concerns of a more serious slowdown for the economy.
Consumer spending continued its pattern of growth in the fourth quarter. The 0.4 percent increase in November’s personal spending marked the ninth straight month of personal spending growth. The three rate cuts from the Federal Reserve (Fed) in 2019 should help spur additional spending growth in the new year.
Rebound in housing marches on
The housing sector has been a bright spot in the current economic expansion. High consumer confidence and lowered mortgage rates have drawn additional home buyers into the market, driving up sales of both existing and new homes.
Home builder confidence rose to a 20-year high in 2019, following a decline to a three-year low at the end of 2018 (see Figure 1). November’s housing starts represent the second-highest monthly level since 2007.
Figure 1. NAHB Housing Market Index, 1999–Present
Source: National Association of Home Builders
Risks continue to shift
Despite the strength in consumer spending, very real risks remain. Business confidence continued to disappoint, and business investment has also been weaker than expected. There is potential for a rebound in 2020, however, given continued progress with the U.S.-China trade talks.
Speaking of trade, the announcement of a deal between the U.S. and China was a clear de-escalation in the ongoing trade war. This agreement shows both sides will continue to negotiate and makes additional tariffs seem unlikely for the time being.
In U.K. news, Prime Minister Boris Johnson’s Conservative party consolidated power in advance of the January 31 deadline for the U.K.’s formal exit from the European Union. The ongoing negotiations on the terms of this exit could lead to volatility for international markets.
In the U.S., the ongoing impeachment proceedings have the potential to create volatility. Previous impeachment proceedings have created short-term market disruptions, so this is certainly something to watch for.
Better year than expected
All things considered, 2019 was a better year for markets and the economy than expected. Strong consumer spending helped power further market gains, even though lowered business investment and confidence remain areas of concern. Continued support from the Fed, along with the anticipated return to earnings growth in 2020, should allow for further market gains.
With that being said, real risks to this outlook remain, especially politically. As always, a well-diversified portfolio that matches investor goals and time horizons remains the best path forward.