When you measure is everything. The major stock indices in the United States posted the strongest returns in recent years with the Nasdaq up 36.7%, Dow Jones Industrials up 25.3% and the S&P 500 (pictured below) 31.5% on a total return basis in the calendar year 2019. These results are undoubtedly impressive but are highly endpoint dependent. At the beginning of 2019 the equity market was reeling mainly due to the perception that the US Federal Reserve intended to pursue overly restrictive monetary policy only to announce quite the opposite at this time last year. The beginning of 2019 was a low point for US equity indices and the year ended with all-time record highs, producing very impressive calendar year returns. What we highlight on this week’s chart is the 14.26% total return (11.16% annualized) of the S&P 500 when measured from the September 2019 high prior to the fourth quarter US Fed-induced market rout. That return is historically strong but not as dramatic as measuring January to January would suggest.
This morning the Labor Department announced that payrolls expanded by 266,000 in November, well ahead of estimates. Just as important, the previous month’s jobs were revised upwards to 156,000 and the unemployment rate matched the 50-year record low of 3.5%. Average hourly wages also expanded 3.1% signaling that consumers’ wallets are gaining on the overall economy. Hiring momentum is no doubt strong and is outpacing growth in the labor force. While this is good for employees currently, continued wage inflation may cut into future corporate profits. The low inflation environment may make it difficult for companies to raise prices as wage pressures may crowd out margins. [chart courtesy Bloomberg LP (c) 2019]
Large Cap stocks in the United States have outperformed the rest of the world for the better part of the past ten years largely because of superior demographic, economic and corporate conditions in America. However, there have been several periods this decade when international bourses have gained ground on America and that has been the case since mid-August this year. While US companies have tended to exhibit robust fundamentals compared to their international rivals, stock market valuations favor international equities. Can the rest of the world continue to outpace the US? We continue to favor American stocks and bonds because economic conditions abroad continue to be challenging. Eurozone economic activity is barely expanding, although the German economy did surprise on the positive side (thus narrowly avoiding a recession) and Chinese GDP growth may be slowing more than expected. The headwinds international markets face may prove to be too much to overcome from a relative performance standpoint. [chart courtesy Bloomberg LP (c) 2019]
Volatility in US Treasury prices has been building for the past six months or so as measured by the ICE Bank of America Merrill Lynch Move Index. That is not all that surprising given the magnifying effect even small interest rate movements have on Treasury prices in today’s low rate environment. The challenge investors face is that bonds, particularly longer-dated issues, offer anemic income streams and the likelihood of principal erosion as rates rise to more normal levels. We continue to maintain lower duration within fixed income allocations than our benchmark because we believe that the long end of the yield curve, here and abroad, offers little investment merit and the potential for a great deal of volatility.
