What a year for markets in 2019! While the year isn’t over, below are some observations and charts on what happened this year through 12/17/19.
Large Gains in 2019
- All major asset classes were positive. Not only were they positive, but the gains were huge. US Large Stocks continued their dominance over the rest of the world. Even bonds were up relatively big.
ETF index disclosure definitions located at end of article. Time period YTD as of 12/17/19
Much of that Large Gain is Recovery from 2018
- While the gain in US Stocks was big, it’s important to take into consideration the large drop we experienced at the end of 2018. From last September’s peak, the stock market is up about 10%. One way of looking at it would be the stock market was pricing in recession at the end of 2018 (down roughly 20%). That was avoided and the market continued to appreciate at roughly the average annual rate of 10%, though nearly all the growth came from dividend yield and multiple expansion. This is important to consider if you’re alarmed the market is overheated.
Strong Returns Across Company Size
- Large Caps were up 30%. Mid-Caps were up 25%. Small Caps were up 22% (source: Koyfin as of 12/17/19). Thus, regardless of Market Cap stock returns were solid, though Large Caps were still favored as they have been over the last 3 and 5 years.
Value Stocks Catching Up to Growth Stocks
- One big change under the hood this year for US Stocks was that Value Stocks have slightly outperformed Growth Stocks, which have dominated Value over the last 3, 5, and 10 years (source: Koyfin as of 12/17/19).
Return Factors Have Fairly Even Returns
- When looking at return factors (specific drivers of return for stocks), Quality, Buybacks, High Beta were all up a little over 30%. Dividend Growth, Momentum, Equal Weight, and Low Volatility (source: Koyfin as of 12/17/19) were about even with the broader market. Only High Yield stocks trailed the market by a fair margin, but still up 20% (source: Koyfin as of 12/17/19).
Technology Leaving Other Sectors Behind
- The best performing sector was Technology, which was up over 40% (source: Koyfin as of 12/17/19)! All the other outperforming sectors (Financials, Communications) were roughly in line with broader market. The only big loser was Energy, down 7% (source: Koyfin as of 12/17/19).
US Stocks Still King, but Will the Trend Change?
- US Stocks have dominated International Stocks over the last 3, 5, and 10 years and YTD as noted above. However, over the last 3 months through 12/17/19 International Stocks have done slightly better than US Stocks (see chart below). Is this the beginning of a new trend rotation or just another pump fake?
ETF index disclosure definitions located at end of article. Time period 3 Months Trailing as of 12/17/19
Bonds Have a Nice Return, Nearly All of Which Came from the First 3 Quarters
- While bonds are up over 8% for the year (source: Koyfin as of 12/17/19), the bulk of the return came through September. Bonds are roughly flat since then as the interest rate decline has subsided.
Will we have new market leaders in 2020 or will it be a continuation of 2019?
- Time will obviously tell; however, intermediate-term market trends will likely be the best guide when making tactical allocation decisions for the year, particularly in US stocks where earnings estimates have reset higher and thus the market is pricing in a re-acceleration of earnings growth. If that growth does not happen, the intermediate-market trend may be a good gage to filter out the short-term noise versus a risk-off market for stocks.
Value Stocks = stocks trade at discount relative to fundamentals Such investments are subject to risks that their intrinsic values may never be realized by the market, or such stock may turn out not to have been undervalued. Investors should carefully consider the additional risks involved in value investments.
Growth Stocks = stocks whose revenues and earnings are expected to increase at a faster rate than the overall market Such investments are subject to risks that their intrinsic values may never be realized by the market, or such stock may turn out not to have been undervalued. Investors should carefully consider the additional risks involved in value investments. Such investments may provide minimal dividends which could otherwise cushion stock prices in a market decline. Stock value may rise and fall significantly based, in part, on investors' perceptions of the company, rather than on fundamental analysis of the stocks. Investors should carefully consider the additional risks involved in growth investments.
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities.
Past performance is not indicative of future results. Investors cannot invest directly in an index. Investing involves risk, including the loss of principal.
The above example allocation is hypothetical and does not take into consideration your risk tolerance. Please talk to your financial advisor before deciding your allocation to Stocks.
There are some risks associated with investing in the stock markets: 1) Systematic risk - also known as market risk, this is the potential for the entire market to decline; 2) Unsystematic risk - the risk that any one stock may go down in value, independent of the stock market as a whole. This also incorporates business risk and event risk; and 3) Opportunity risk and liquidity risk.
Tactical allocation is an active management portfolio strategy that shifts the percentage of assets held in various categories to take advantage of market pricing anomalies or strong market sectors.
Large Cap refers to companies with a market capitalization value of more than $10 billion. Market capitalization is calculated by multiplying the number of a company's shares outstanding by its stock price per share. Small and mid-cap stocks may be subject to a higher degree of risk than larger, more established companies’ securities, including higher risk of failure and higher volatility. The illiquidity of the small and mid-cap markets may adversely affect the value of these investments so those shares, when redeemed, may be worth more or less than their original cost.
A recession is a significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP); although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession.
International investing involves special risks, including, but not limited to, the possibility of substantial volatility due to currency fluctuation and political uncertainties. Emerging markets are sought by investors for the prospect of high returns, as they often experience faster economic growth as measured by GDP. Investments in emerging markets come with much greater risk due to political instability, domestic infrastructure problems, currency volatility and limited equity opportunities (many large companies may still be "state-run" or private). Also, local stock exchanges may not offer liquid markets for outside investors
Index ETF definitions:
The Vanguard Total Stock Market ETF (VTI) is a market capitalization-weighted index that measures the entire investable U.S. equity market. It includes small-, mid-, and large-cap companies. The fund is managed in a passive manner and uses an index-sampling strategy. Investopedia.com
The iShares MSCI EAFE ETF (EFA) seeks to track the investment results of an index composed of large- and mid-capitalization developed market equities, excluding the U.S. and Canada. Ishares.com
The iShares MSCI Emerging Markets ETF (EEM) seeks to track the investment results of an index composed of large- and mid-capitalization emerging market equities. Ishares.com
The iShares Core U.S. Aggregate Bond ETF (AGG) seeks to track the investment results of an index composed of the total U.S. investment-grade bond market