US stocks closed out the year up over 30%, the highest calendar year return since 2013. During the final quarter, the US and China reached a “phase one” trade deal and Congress was poised to sign the new US-Mexico-Canada trade deal. Conservatives won a large majority in Britain’s recent election and plan to move quickly on Brexit. The Federal Reserve indicated fewer rate changes for the near future, calming investor concerns. These developments helped to overcome rising uncertainty over impeachment proceedings and fueled a strong finish to an already outstanding year for the markets.
US stocks have enjoyed 11+ years of growth, which represents the longest recorded bull market in history. Stocks surged throughout the year, repeatedly achieving record level highs. Stock momentum was driven by easing trade tensions, continued low interest rates, stable inflation, and the strongest US labor market in 50 years. US stocks finished up 8.7% for the quarter and a remarkable 31.1% for the year. International stocks also achieved impressive results, with gains of 8.2% for the quarter and 22.6% for the year.
Bond investors were rewarded during 4Q as well. The Federal Reserve cut interest rates three times since last July, causing bond values to rise. Most other central banks also kept interest rates low to help drive economic growth. Over 25% of the world’s investment-grade bonds now offer negative yields, further highlighting the unprecedented easy money policies around the world. Overall, US taxable bonds were up 0.3% for the quarter and a notable 8.8% for 2019. Tax-free municipal bonds produced positive growth of 0.9% for the quarter and 5.6% for the year.
US GDP grew steadily but moderately in 3Q at 2.1%. Consumption served as the major driver of growth during the quarter, contributing nearly 2 percentage points to the overall pace. However, business investment continued to decline due to the protracted US-China trade dispute. Future economic growth is dependent on whether the “phase one” trade deal will be sufficient to encourage businesses to rebuild inventories and increase capital spending. Manufacturers are struggling to find skilled labor in a tight job market, which restricts their ability to expand. Nevertheless, the holiday shopping season should give the economy a boost, as job growth and consumer spending remain strong.
The US labor market continues to boom with unemployment dropping back down to 3.5%, the lowest rate since 1969. In November, the economy added 266,000 jobs, bringing the average job creation rate to 180,000 per month in 2019. This rate is well above the level needed to provide jobs for new workers entering the workforce. Wages continue to outpace inflation, rising 3.1% in November.
Moderate economic growth and rising wages have been squeezing corporate margins. A rise in the value of the dollar has also hurt US companies’ overseas earnings. Moreover, the slowdown in profit growth reflects the fading effects of tax reform. Operating earnings are expected to decline 0.4% in 3Q, the fourth consecutive quarter of lackluster corporate performance. Revenues increased 3.8% year-over-year for 3Q, also down from the prior quarter.
Following short-term interest rate cuts in July, September, and November, the Federal Open Market Committee unanimously announced their decision to hold rates steady for the near future. At their December meeting, the Fed indicated a reluctance to raise rates, even if inflation moved above their 2% target rate. They plan to keep rates low until they see “persistent and significant inflation.”
The Fed’s rate cuts helped nudge inflation upward in 4Q. In November, the Consumer Price Index finally surpassed 2.1% year-over-year, slightly above the Fed’s target inflation rate. The Fed is hesitant to adjust interest rates, knowing that past inflation moves above 2% have been short-lived. There remains some distance from the “persistent and significant inflation” necessary to change their course.
The end of 2019 brought clarity on several important fronts, including global trade and central bank policy. The US and China took steps toward a trade dispute truce or pause. Britain is finally on track to exit the European Union. The US-Mexico-Canada trade agreement is expected to be signed soon. Central banks continue to encourage low interest rate policies to avert economic recession. Despite these drivers, we expect continued political drama up through the US elections next November. While 2019 was an outstanding year for both stock and bond investors, we encourage investors to remain grounded and to temper performance expectations for 2020. The current investment climate underscores the importance of maintaining a well-diversified portfolio which reflects your financial goals and risk tolerance.