4th Quarter 2019 Economic & Market Review
Economy and the Federal Reserve
Global economic growth continued to slow and in some cases, contract, while U.S. economic growth continued at a relatively steady, but slower pace than the prior year. U.S. GDP came in at a 2.1% annualized rate for Q319 (information reported in Q419). This reading was in line with expectations for the quarter. The economy is in the 10th year of its expansion, the longest on record. The employment picture generally remained solid in Q4 with the unemployment rate at 3.5%; in addition, employment growth in October and November averaged 209,000 after averaging a monthly gain of 170,000 for the previous 12-months. The housing market remained weak. While year-over-year home sales picked up, year-over-year home price increases remained around a 2.0% growth rate. Growth in the US manufacturing sector also slowed, with several regional indicators showing contraction. The Federal Reserve (the “Fed”), cut rates once in the fourth quarter (three times during 2019) while financial markets expect at most one additional rate cut in 2020.
Stocks rallied strongly in 4Q19. The S&P 500 Index, representing large-cap stocks, advanced 9.1% for Q4 and 31.5% for the year. Small-cap stocks outperformed their large-cap counterparts for Q4 as the Russell 2000 Index rose by 9.9% (25.5% for 2019). Meanwhile, the Russell Midcap Index returned 7.1% for the quarter (30.5% for the year). In terms of style, growth outperformed value for the quarter, although small and mid-cap value stocks outperformed in December. Sectors showed mixed results in Q4. Information Technology and Health Care were the strongest relative performers, returning 14.4% each. The Real Estate and Utilities sectors were the poorest performers, posting returns of -0.5% and 0.8%, respectively. Emerging Markets rose by 11.7% (18.6% for the year) while the MSCI EAFE Index (representative of developed non-U.S. equity markets) returned 8.2% (22.8% for 2019).
U.S. interest rates continued at low levels last seen in 2016 and 2017. After an inversion between June and October, the Treasury yield curve resumed a normal shape (i.e. yields were higher for longer maturities than for shorter maturities). Interest rates fell for short-term U.S. Treasury securities in Q4 driven by the Fed rate cut during the quarter, while longer term rates rose. For Q4, the Bloomberg Barclays U.S. Aggregate Bond Index (representing investment grade U.S. bonds) increased 0.2% (8.7% for the year); the Bloomberg Barclays Long Credit Index was up 1.2% (23.4% for 2019) and the Bloomberg Barclays U.S. Aggregate Corporate High Yield Index returned 2.6% (14.3% for 2019).
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