By Clark Capital Management Group
- December 2019 was certainly no repeat of December 2018. After dropping over 9% to close out 2018, the S&P 500 gained 3.0% during the final month of 2019 and put in several new all-time highs as the year concluded. Overall, the S&P 500 gained 31.5% in 2019.
- Volatility started and finished the month somewhat elevated, but the middle of December was rather calm as stocks marched higher to new all-time highs. Volatility will likely pick up as we move into the New Year, but fundamentals, which we believe drive results in the long-term, remain solid.
- As stocks rallied amid a “risk-on” trade, bond prices moved down and yields rose in December with the 10-year U.S. Treasury rising to 1.92% by month’s end compared to November’s close of 1.78%.
- International stocks enjoyed a stronger end to 2019, particularly emerging market equities, with returns above the major U.S. equity indices in December. However, U.S. stocks were the clear leader overall in 2019.
- The longest U.S. economic expansion on record continued and coincided with stocks hitting all-time highs during 2019 and we believe economic growth will continue well into 2020.
- A phase one trade deal with China appeared to be agreed upon late in 2019 and markets reacted positively to this pause in trade tensions. Concerns, as always, continue to exist. Moving into 2020, a final trade deal with China continues to be outstanding, the Trump impeachment trial will likely arrive early in the year, the long-awaited Brexit might finally take place and a U.S. presidential election awaits in November.
- Despite these concerns, markets climbed the wall of worry and focused on economic and business fundamentals and stocks rallied in 2019.
Markets did not pause in the final quarter or final month of 2019 and major U.S. equity indices achieved new all-time highs as the year concluded. The trade situation with China had been an on-again, off-again weight on stocks in 2019. Late in the year, a so-called phase one trade deal with China had apparently been agreed upon with a signing ceremony scheduled for mid-January at the White House.
As this temporary amelioration in the trade war with China hit the markets, stocks rallied and closed the year out strongly. The backdrop of the Trump impeachment proceedings in the House and, ultimately, a vote of impeachment, appeared to have little impact on the market. Playing out along party lines, the formal impeachment in the House seemed a foregone conclusion. The trial in the Senate seems equally a foregone conclusion with very little chance of Trump being removed from office, so markets have largely dismissed this political event.
Fed Chairman Powell lowered policy rates three times in the second half of 2019, largely in line with expectations. Outside of engaging in notable liquidity operations, which has the effect of increasing its balance sheet, the Fed seems content with remaining on hold for the foreseeable future. After years of being on the front lines of market and economic expectations, the Fed appears to be heading to a quieter role in 2020 operating more in the background of the economy. This will likely be a welcome development for Powell who will no doubt enjoy being out of the limelight, at least temporarily, in 2020.
In 2019, we generally saw U.S. large-cap growth companies outpace most other parts of the market. However, we have noted that other areas of the market made some headway against this broader trend in the latter part of 2019. While hard to poke holes in any return data after such an exceptional year of widespread stock market results, the theme of growth outperforming value did hold overall in 2019.
At Clark Capital, we employ value-oriented measures in our investment process and believe that over a full market cycle, buying good companies at a good price will be rewarded. Earlier this year, we were seeing historical extremes in the market when looking at the discount that value stocks were trading at compared to the broader market. We continue to believe that this growth/value situation will revert closer to historical norms and value-oriented stocks should benefit in the long run. As more diverse areas of the market make gains (for example international stocks), we believe diversified portfolios should benefit as well.
The numbers for December were as follows: The S&P 500 advanced 3.02%, the Dow Jones Industrial Average gained 1.87%, the Russell 3000 increased 2.89%, the NASDAQ Composite rose an impressive 3.63% and the Russell 2000 Index, a measure of small-cap companies, improved by 2.88%. The large-cap and value focused Russell 1000 Value Index gained 2.75% compared to the Russell 1000 Growth Index, which advanced 3.02%.
While both indices showed strong results for the year, the dominance of growth was clear when looking at these indices with the growth index advancing 36.39% compared to its value counterpart, which gained 26.54% – a nearly thousand basis-point difference. The difference was not quite as dramatic in the small-cap universe, but it held nonetheless. Although small-cap value stocks, as measured by the Russell 2000 Value Index, were strong in December (up 3.50% compared to the Russell 2000 Growth Index gain of 2.29%), the returns for the year were 22.39% and 28.48%, respectively.
Emerging market equities rallied sharply to close out 2019 and more broadly, international stocks closed out the year on a strong note. While choppy, the U.S. dollar moved lower in December and aided international results. However, those international returns still lagged the U.S. markets overall in 2019. Emerging market equities, as measured by the MSCI Emerging Markets Index, rallied 7.46% in December, pushing gains for the year to 18.42%. The MSCI ACWI ex USA Index, a broad measure of international equities, advanced 4.33% in December, which helped increase the gains for 2019 to 21.51%.
Fixed income results were mixed in December as rates moved higher. In a month defined by a more risk-on tone to the rally, high-yield bonds performed the best and safer and more interest sensitive pockets of the market struggled. Despite more mixed results in December, most areas of fixed income enjoyed solid gains in 2019 as interest rates ended the year dramatically lower than where they began 2019.
The closing yield for the 10-year U.S. Treasury in 2019 was 1.92% compared to 2.69% in December 2018. We believe that rates will be rather range-bound in 2020 between 1.5% and 2.5% and we maintain our long-standing position favoring credit versus interest rate exposure in this environment.
For the second consecutive month, the Bloomberg Barclays U.S. Aggregate Bond Index was off a fraction of a percent, down -0.07% for the month, the Bloomberg Barclays U.S. Credit Index advanced 0.29%, the Bloomberg Barclays U.S. Corporate High Yield Index rose by 2.00% and longer-dated U.S. Treasuries were down. For example, the Bloomberg Barclays U.S. 30 Year Treasury Index slumped -3.50% in December. TIPS and muni bonds both advanced in December.
ECONOMIC DATA AND OUTLOOK
The record length of this economic expansion continues to build on its decade-plus tenure as we close out 2019. Concerns have lingered regarding how long this expansion can last and, while data is mixed, slow economic growth continues. We continue to expect that this expansion will run well into 2020.
The inversion of the yield curve occurred in 2019, but we closed out the year with the yield curve positively sloped once again. We have written several times about the historical importance of a yield curve inversion and how every recession we have had since the 1960s has been preceded by an inverted yield curve.
However, there have also been two instances of an inverted yield curve without a recession. It is also important to acknowledge that the Fed has made a clear U-turn in 2019 from its tightening ways from December 2015-December 2018. October saw the Fed cut rates for the third time in three consecutive FOMC meetings as it clearly moved to a more expansionary bias versus contractionary. The key question we will continue to focus on is did the Fed reverse course in time?