PPG Insights

Quarter 4 2019 Market Overview

Dear Valued Client,

Solid fourth quarter gains helped the S&P 500 Index achieve its best annual return since 2013. Following December 2018, few were expecting performance in the S&P 500 to be up more than 31%. With talk in the media of a global recession, coupled with our nation embarking on a trade war with China, most expected including ourselves, a challenging environment with increased market volatility.

Twice in 2019, first in May and again in August, tariff increases caused a significant spike in market volatility. The US economy remained, however, very strong throughout the year led by strong employment gains and supported by an accommodative Federal Reserve, which cut interest rates three times in 2019.

Looking forward to 2020, an election year, we view the global economic landscape as broadly stable with an upward bias towards increased global growth. With phase one of a trade deal now signed with China and UK exiting the EU, it is reasonable to expect increased global business confidence and renewed cross border commerce. However, it would be unrealistic to expect the performance of 2019 in global equity markets to repeat in 2020.

While the fundamental outlook for the global economy and asset markets has improved since the trough of the 2018 correction, and while markets have responded accordingly, it is very important to realize that, despite the strong performance in 2019, markets still face significant uncertainties, and we are committed to monitoring these situations and their impact on the markets and your portfolio.

It is with these expectations, that not ‘if’ but ‘when’ the equity markets do pull back, by design your portfolio is structured in the balanced and diversified way that it is. In this new year of 2020 and beyond, we here at Professional Planning Group, shall continue to keep a vigilant eye on the global financial marketplace, with your best interests, foremost in our minds.

Please see our more detailed quarterly market analysis of this overview below.

Quarter 4 2019 Market Analysis

Markets welcomed the positive resolution of several key macroeconomic unknowns in the fourth quarter, and that improved clarity sent the broader stock market higher over the past three months. The solid fourth quarter gains helped the S&P 500 index achieve its best annual return since 2013.

At the start of the fourth quarter, markets were facing four significant macroeconomic uncertainties: Could the U.S. and China strike a trade deal? Would the Fed cut interest rates for a third time in 2019? Could U.S. and global economies stabilize? Would Brexit get passed? Within each of these unknowns, which had weighed heavily on markets earlier in 2019, we saw positive progress throughout the final three months of the year.

By far, the most important event for markets during the fourth quarter was the agreement to a “phase one” trade deal by the U.S. and China. Since early 2018, the U.S.-China trade war, and the tariffs that ensued, pressured the global economy and weighed heavily on manufacturing, exports and investor sentiment. Twice in 2019, first in May and again in August, tariff increases caused a significant spike in market volatility.

By mid-October however, after intensive negotiations, both the U.S. and China agreed, in principle, to a phase one trade deal that would result in the reduction of existing tariffs, the promise of no additional tariffs, and the increased imports of American goods by China. Anticipation of this “in principle” deal being formally agreed to, powered stocks higher from mid-October through mid-December. Then on December 13th, more specific details of the phase one deal were announced, and that clarity helped stocks extend the 2019 rally into year-end.

Improvement in U.S.-China trade relations wasn’t the only positive event in the fourth quarter though. The Federal Reserve met market expectations by cutting its benchmark interest rate by another 25 basis points at the meeting on October 30th. That cut brought the total reduction in short-term interest rates in 2019 to 75 basis points, the largest annual reduction in over a decade. Additionally, at the December policy meeting the members of the Federal Open Market Committee communicated they do not expect to raise interest rates in 2020. This additional clarity for Federal Reserve interest rate policy expectations, specifically that the market can expect rates to stay low for longer, helped to steepen the yield curve, increase the velocity of money and power the equity markets higher in the fourth quarter.

The global and U.S. economies also showed signs of stabilization in the fourth quarter after losing positive momentum for much of 2019. First, in the United States, concerns were growing that sluggish business spending and investment would potentially cause a broader economic slowdown. But the market’s preferred measure of business spending and investment, the monthly Durable Goods report, rebounded in the fourth quarter, easing some of those growth concerns. Internationally, measures of Chinese manufacturing activity, which had shown the industry was in contraction for the past several months, turned positive again in December, and that implied activity was stabilizing. Encouraging also, developed European economies, largely export driven, have recently shown signs of stabilization. So, while concerns remain about the next direction of the global economy, these signs of progress in the fourth quarter further helped the broader stock markets rally.

Finally, after three-and-a-half years of Brexit uncertainty, investors can finally expect some progress as the mid-December elections in the United Kingdom resulted in a strong conservative (or Tory) party majority. As a result, the Brexit agreement with the EU is expected to pass Parliament in early 2020.

In sum, the fourth quarter of 2019 was a reminder that macroeconomic fundamentals matter, and the positive news on four key macroeconomic fronts fueled a broad rally in the global stock markets and makes it more likely, but not certain, that we will see improved global economic growth and consequently, better earnings in 2020.

4th-Quarter and Full-Year 2019 Performance Review

The major U.S. stock indices were all solidly higher in the fourth quarter led by the tech-heavy Nasdaq which handily outperformed thanks to rising optimism on U.S.-China trade and expectations for a rebound in economic growth. The S&P 500, Dow Jones Industrial Average and Russell 2000 (the small-cap index) all had smaller, yet positive, quarterly returns. The performance of the major indices in the fourth quarter mirrored the full-year performance, as the Nasdaq easily outperformed the other three indices in 2019 as investors sought the secular growth potential of the tech sector amidst macroeconomic uncertainty.

Looking at market capitalization, large caps outperformed small caps for the full year. That reflected investor concerns about a potentially slowing global economy, as large caps are historically less sensitive to slowing growth than small cap stocks. Notably, however, small caps did narrow the performance gap in the fourth quarter, which implied rising optimism towards the global economy in 2020, following the announcement of the U.S.-China trade deal. From an investment style standpoint, growth outperformed value again in the fourth quarter due to strength in large-cap tech. That widened the performance gap for the full year 2019, as growth considerably outperformed value, mostly due to the strength in the technology sector of the market.

Looking a bit deeper into the sector level, 10 of the 11 S&P 500 sectors finished the fourth quarter with positive returns. Technology, financials and healthcare stocks led markets higher in the fourth quarter, which is a reversal from the defensive sector outperformance we witnessed in the third quarter of 2019. Expectations that the U.S.-China trade deal would lead to better economic growth combined with higher bond yields and a steepening yield curve, helped power the rally in tech and financials. In the meantime, while healthcare gained on a reduction in political headwinds as candidates who favor expansion of the government healthcare programs, dubbed “Medicare for all,” dropped in the polls. For 2019, the big fourth-quarter rallies by tech and financials helped those two sectors outperform on a full-year basis.

Sector laggards in the fourth quarter were the traditionally defensive market sectors. Real Estate was the only S&P 500 sector to finish negative in the fourth quarter, while utilities and consumer staples underperformed the S&P 500 as the U.S.-China trade deal caused investors to rotate into sectors that are more sensitive to a potential upswing in global growth. On a full-year basis, energy was the relative sector laggard as market worries about a slowing global economy combined with the potential oversupply of oil weighed on energy shares, although the energy sector still finished 2019 with a respectable annual gain.

S&P 500 Total Returns by Month in 2019

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

7.78%

2.97%

1.79%

3.93%

-6.58%

6.89%

1.31%

-1.81%

1.72%

2.04%

3.40%

2.86%

Source: Morningstar

US Equity Indexes

Q4 Return

2019 Return

S&P 500

9.07%

31.49%

DJ Industrial Average

6.67%

25.34%

NASDAQ 100

12.99%

39.46%

S&P MidCap 400

7.06%

26.20%

Russell 2000

9.94%

25.52%

Source: YCharts

Looking internationally, foreign markets saw positive returns in the fourth quarter due mostly to the U.S.-China (phase-one) trade deal. Most foreign markets however, still underperformed the U.S. markets. Foreign developed markets posted solid gains in the fourth quarter but lagged emerging market returns. Notably, emerging markets outperformed both foreign developed markets and the S&P 500 in the fourth quarter thanks to rising expectations for a global economic rebound, combined with some declines in the U.S. dollar. For the full year 2019, foreign markets registered solidly positive returns, with foreign developed markets modestly outperforming emerging markets. However, both underperformed the S&P 500 in 2019.

International Equity Indexes

Q4 Return

2019 Return

MSCI EAFE TR USD (Foreign Developed)

8.21%

22.66%

MSCI EM TR USD (Emerging Markets)

11.93%

18.90%

MSCI ACWI Ex USA TR USD (Foreign Dev & EM)

8.99%

22.13%

Source: YCharts

Commodities enjoyed strong gains in the fourth quarter, led higher by a rally in oil while gold saw a more modest rally over the past three months. Oil prices rose in the fourth quarter thanks to the decision by “OPEC+” to deepen production cuts this year, combined with the U.S.-China trade deal raising expectations for global growth and future oil demand. Gold, meanwhile, spent much of the fourth quarter in negative territory as investors rotated out of the safe-haven metal and into more risky assets following the de-escalation of the U.S.-China trade war. But, a late-year decline in the U.S. Dollar, combined with a mild increase in geo-political tensions, helped gold rally late in December and register a positive return for the quarter. For 2019, commodities produced positive returns which were driven by a large gain in the price of oil, although commodities as an asset class lagged the S&P 500 on a full-year basis.

Commodity Indexes

Q4 Return

2019 Return

S&P GSCI (Broad-Based Commodities)

8.31%

17.63%

S&P GSCI Crude Oil

14.44%

34.09%

GLD Gold Price

2.90%

17.86%

Source: YCharts

Switching to fixed income markets, the total return for most bond classes were positive in the fourth quarter, although longer-dated Treasuries saw mild declines, which is not surprising given rising expectations for a rebound in global growth. The leading benchmark for bonds (Bloomberg Barclays US Aggregate Bond Index) experienced slightly positive returns for the fifth straight quarter.

Looking deeper into the fixed income markets, longer-duration bonds underperformed those with shorter durations in the fourth quarter which was a reversal from most of 2019. This recent steepening of the yield curve is reflective of a market that is responding to the recent Fed rate cuts and beginning to expect a rebound in global economic growth going forward.

Confirming that improved sentiment, corporate bonds saw solidly positive returns in the fourth quarter as high yield debt outperformed investment-grade debt. The outperformance of lower quality but higher yielding corporate debt also underscored rising optimism about future economic growth and corporate earnings.

US Bond Indexes

Q4 Return

2019 Return

BBgBarc US Agg Bond

0.18%

8.72%

BBgBarc US T-Bill 1-3 Mon

0.44%

2.21%

ICE US T-Bond 7-10 Year

-1.23%

8.50%

BBgBarc US MBS (Mortgage-backed)

0.71%

6.35%

BBgBarc Municipal

0.74%

7.54%

BBgBarc US Corporate Invest Grade

1.18%

14.54%

BBgBarc US Corporate High Yield

2.61%

14.32%


1st Quarter and 2020 Market Outlook

The markets’ performance in 2019 was a good reminder of the difference a year can make. In January 2019, the S&P 500 was coming out of its first negative year in a decade; worries about the global economy were surging due to the U.S.-China trade war and the Federal Reserve had just hiked interest rates the previous month.

Now, we begin the year 2020 on the opposite end of the spectrum.

The S&P 500 just registered its best annual return since 2013, worries about the global economy are receding thanks to the U.S.-China trade deal and the Federal Reserve remains accommodative, having cut interest rates three times in 2019.

For us here at PPG, the takeaway from this is clear: What happened in the markets last year doesn’t mean much for what could happen in the markets this year. As mentioned in the notes above, there is discernable optimism on the global economy that is evidenced in the global steepening of yield curves, firmer commodity prices, improved capex spending, consumer confidence and export driven data points.

We would be remiss however, in more familiar phrasing, not to remind ourselves that: Past performance is not indicative of future returns.

So, while the macroeconomic environment is favorable as we begin 2020, a new year always brings new challenges and uncertainties, especially when it’s an election year.

More specifically, as we begin 2020, we are monitoring several unknowns that, with the market at historically high valuation levels, could cause volatility in 2020.

Regarding U.S. – China trade, while sentiment towards Trump’s phase one trade deal is clearly positive, specific details remain light. At some point though, the market will demand that the details of the trade deal meet now – elevated expectations.

Turning to the economy, markets are expecting a rebound in global economic growth. So, the upcoming economic data needs to continue to show signs of stabilization and, ultimately, a re-acceleration of economic growth not just in the United States, but globally.

Looking at domestic politics, there is an election coming in November and while many analysts don’t expect it to begin to influence the markets until later this summer, we could know who the Democratic nominee is by the end of March. Depending on who that person is, it could cause unexpected volatility. Meanwhile, on the geopolitical front, we have relative calm, although tensions with North Korea and Iran are potentially rising.

Bottom line, the fundamental outlook for the economy and asset markets has improved since the depths of the 2018 correction, and stocks have responded accordingly. But it is very important to realize that, despite the strong performance in 2019, markets still face significant uncertainties, and we are committed to monitoring these situations and their impact on the markets and your portfolio.

Having been through both good and bad markets, The Professional Planning Group has learned that those experiences ensure that we guard against complacency following a year of strong annual returns. We remain committed to helping you navigate this ever-changing market environment, with a focused eye on ensuring that we continue to make progress on achieving your long-term investment goals.

Our experience in all types of markets (both positive and negative) have taught us that successful investing remains a marathon, not a sprint.

Therefore, it remains critical to stay invested, remain patient, and stick to a plan. That’s why we’ve worked diligently with you to establish a personal allocation target based on your financial position, risk tolerance, and investment time horizon.

The strong market performance of 2019 notwithstanding, we remain vigilant towards risks to portfolios and the economy, and we thank you for your ongoing confidence and trust. Rest assured that our entire team will remain dedicated to helping you successfully navigate this market environment.

Please do not hesitate to contact us at any time with any questions or comments.

We look forward to seeing you in 2020!

Warmest regards,

Malcolm A. Makin, CFP®
President

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Professional Planning Group and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

Additional information, including management fees and expenses, is provided on Professional Planning Group’s Form ADV Part 2, available upon request or at the SEC’s public disclosure site, https://www.adviserinfo.sec.gov/Firm/108868. Past performance is not a guarantee of future results.