The markets love a dovish Fed and that is what it got in 2019. Going into 2019, there was a prospect of higher rates that was quickly squashed by a data-dependent Fed that cited potential economic weaknesses here and abroad. The Fed reversed course and pointed to lower rates. Easing of global trade concerns helped, too! The S&P 500 responded accordingly with a stellar 2019 total return of 31.49% (including dividends), the strongest annual performance since 2013. Q4 showed a continuation of the trends set up earlier in the year with equities extending their gains and bonds showing some weakness due to yield curve steepening.
The equity rally was broadly based with some relative winners and laggards. During Q4, large- and small-cap equities represented by the S&P 500 (IVV) and the DJ U.S. Small Cap Total Market Index (SCHA) were strong performers with both being up about 9%, while mid-cap (SCHM) lagged at 7%. Factor plays, that are expected to outperform over a full market cycle, also lagged in Q4 with momentum (MTUM) and low vol (USMV) producing returns of 5.72% and 2.95%. Real estate investment trusts (SCHH) gave back some of its big gains earned earlier in the year with Q4 returns of -1.95%. Finally, of all the major broad asset classes, emerging market equities (IEMG) led all markets in Q4 with a 12.18% return.
Fixed income markets were less bullish in Q4 due to the yield curve steepening prompted by Fed easing and the market taking long rates higher. Core bonds (SCHZ) were mostly flat with a Q4 return of 0.10%. Bonds with some credit spread were the winners in Q4 with emerging market bonds (EMB) and high yield bonds (HYG) leading the pack with returns of 2.56% and 2.48%. Likewise, short bank loans (BKLN) with some credit spread improved with a 2.20% return.
So, will this trend continue? Most of the indicators I follow point to a bullish “risk-on” sentiment for the near term. But, as I reported in my Dec. 1 blog post, “My Favorite Chart”:
Fans of “reversion to the mean” will be anxiously awaiting the S&P 500 retraction whereas “momentum” players are looking for more gains. We shall see; best to stay well-diversified in a portfolio managed to your appropriate risk-profile.