The Year No Financial Experts Saw Coming
January 6, 2020
By Krista Eberly, CFP®
Securities Analyst II
Last week, my colleague Michael List gave us a decade in review. This week I wanted to focus on 2019 in particular, because it turned out to be a phenomenal year that no one saw coming.
2019 Financial Year in Review
Starting out the year, no one thought we would record the very strong returns for both fixed income and equities. Stocks had their best year since 2013 and bonds their best year since 2011 (from a total return basis). Let’s look back at the key highlights from 2019:
The longest U.S. government shutdown in history occurred.
The year started out with political drama from Washington as we experienced the longest U.S. government shutdown in history. It lasted 35 days, beating the previous record (21) by two weeks. Although the shutdown was resolved by the end of January, political drama ensued throughout the year finishing the year with the impeachment proceedings. Despite the sharp rhetoric, the markets largely shrugged off political noise in 2019, as they should.
Central banks around the world cut interest rates.
Central banks around the world, including the Federal Reserve, did an abrupt about face and changed course on monetary policy with interest rate cuts to help stimulate economic growth. The Federal Reserve delivered three 0.25-percent rate cuts throughout the year to help protect against downside risks. The Fed ended the year on hold believing its current policy is enough to keep the U.S. economy moving forward. Currently, there are no rate cuts or increases forecast for this year.
We returned to a low interest rate environment.
We saw interest rates decline across the board in 2019 as both short and long-term rates fell. Short-term rates fell from monetary policy and long-term rates declined due to slowing growth and low inflation. This was a surprise to investors, as most didn't think rates would fall as much as they did. The 2-year Treasury note slipped from 2.49% to 1.57% and the 10-year Treasury note fell from 2.68% to close the year at 1.92%.
Global growth surprised to the downside.
The theme for global growth in 2019 was slowing but still growing. Most economists forecasted higher global growth in 2019 but it did not turn out that way. We experienced a global growth slowdown, both here in the U.S. and abroad. In addition, there was a contraction in global manufacturing due to trade and tariff concerns. The countries more dependent on trade saw their economies slow down more than others did.
The U.S. economic expansion became the longest in history in July.
As the saying goes, slow and steady wins the race! We can use this to describe the current U.S. economic expansion, as it is the slowest and now longest in U.S. history. What kept the expansion alive was the U.S. consumer — the key driver of gross domestic product (GDP) in 2019. The consumer is on solid footing entering into the near year and this bodes well for U.S. economic growth in 2020.
Negative yielding debt returned with a vengeance.
We first talked about negative yielding debt back in 2016, when it started to emerge from the unprecedented monetary policies from Europe and Japan. However, it came back with a vengeance in 2019 due to central banks cutting interest rates and slowing global growth. The pool of negative yielding debt reached a record high of $15 trillion in August before ending the year around $12-13 trillion. Current levels are still higher than in 2016.
Recession fears came to the forefront in August with the yield curve inverting.
With the U.S. economy experiencing the longest expansion in history, everyone worried about when the next recession will occur. These recession fears peaked in August when we saw the 2 to 10-year area of the U.S. yield curve invert. An inverted yield curve is a precursor for a recession down the road, but it is not a timing device. This inversion was brief and ended up being an overreaction from investors and the yield curve has steepened since. The year ended in positive territory with the spread between the 2 and 10-year Treasury notes at +35 basis points or 0.35%.
Trade, trade, and more trade news!
We can’t talk about 2019 without talking about trade. If anything dominated the headlines as much as political news, it was trade tensions between the U.S. and China. These discussions went back and forth throughout the year and ended with a “Phase One” trade deal between the U.S. and China. This deal is expected to be signed sometime this month. Trade progress is a positive for the markets. However, trade tensions remain a key uncertainty in 2020.
Volatility increased, but stocks persevered to hit new all-time highs.
There were many uncertainties for the markets in 2019, particularly regarding trade that triggered higher volatility than the previous year. Despite the wild swings, stocks weathered through and recorded strong returns for the calendar year. All three of the major U.S. stock indices (Dow Jones Industrial Average, NASDAQ, and S&P 500) hit several new all-time highs during the year and ended 2019 on a strong note. As I noted above, stocks had their best year since 2013.
After a strong year, what does this mean for 2020?
We can look back at history to answer this. The chart below from the Wall Street Journal’s Daily Shot® shows what historically happens in a year following a 20%+ return in the S&P 500. The index is higher 75 percent of the time with an average gain of 12 percent following a year like 2019. History suggests 2020 could turn out to be another positive year for the markets.
Do you have an objective for your investments and did they meet that objective in 2019? A Bankrate survey found that 61% of Americans do not even know how much they will need to retire, let alone whether they are on track with their investments. If you would like to start the year off right, schedule a year-end review. Please contact your Security National Wealth Management Advisor today. We have a great story to share with our clients!