What a spectacular year for stocks in 2019! At this time last year, who would have thought that a year later we would be celebrating such growth? If you can remember back to December of 2018, the stock market was down nearly 20%, and according to media reports the outlook for 2019 was gloomy. Yet here we are one year later with US stocks continuing to outperform with growth of 9.1% for the quarter and an impressive 31% for the year. Within that category US large cap stocks did even better, yielding 10.6% for the quarter and 36.3% for the year. International developed stocks (e.g., Europe/Japan) grew by “just” 7.9% for the quarter and 23% for the year. Emerging market stocks were up 11.9% for the quarter and “only” 18% for the year. Bonds, surprisingly, had a fantastic year as well. For 2019 bond returns were up 8.7% in the US and 7.6% outside the US.
What drives this growth, and can we expect it to continue in 2020? Factors like subdued inflation and a robust labor market, which have helped support the markets over the past few years, are poised to help again this year. Year-to-year core US inflation at 2.3% is slightly above the Federal Reserve’s 2% target but importantly shows no sign of accelerating. The labor market continues to demonstrate signs of resiliency, adding 150,000 jobs in December and keeping unemployment at 50-year lows. The headwinds that seemed scary last year, namely the US trade war with China, does not appear to be as large an issue now. A phase one agreement between the two countries has recently been signed. Although reviews of the deal suggest that overall benefits appear slight, it does provide some respite to the ongoing tariff war.
A temporary cease fire to the trade war removes one impediment to growth. The uncertainty caused by the escalation and threat of further escalation of tariffs restrained growth here and around the world. With a cease fire in the tariff war in place, world economies are better positioned for growth. The Federal Reserve has signaled that it will be keeping interest rates steady, which means it won’t be trying to choke off any growth through interest rate hikes. Although economic growth may be slowing, the risk of recession appears to be low.
Congratulations to everyone for sticking with your investment plan and not chasing performance. As the enclosed investment return table shows, for example, the large cap equity (dark blue squares/S&P 500) has had above average performance and has been in the top half of categories for the last 10 years. Interestingly, it was in the bottom half the prior 10 years! What will the next 10 years bring for large cap equity? Chasing after the next winning asset class is really a fool’s errand. Staying invested, keeping diversified across asset classes, and managing your savings, taxes, and expenses well are the keys to helping you maintain a winning long-term investment plan.
One positive development regarding expenses: Dimensional Fund Advisors, our primary money manager, announced an average fee reduction of 8% on their funds. This will increase your net returns! On a related note, some of you have asked what the pending TD Ameritrade merger may mean in terms of your fees and service. We don’t see any changes occurring in the short run, and honestly, don’t know what changes might occur in the longer term. Rest assured, whatever the future holds, we will continue to implement changes in a way that is best for our clients! Please let us know if you have any market or investment questions or concerns!
Christina Povenmire, CFP®, MBABarry Jamieson, CFP®, MA