NEW YORK: The out sized rally in the US stock market this year may give way to a more muted performance in 2020 if history is any guide.The benchmark S-P 500 is up nearly 28% for the year, which if the market closed this week for the year, would mark the second-best annual performance for the index since 1997.However, investors who are hoping the rally will continue charging ahead through next year may be disappointed.
The S-P 500 has returned an average of 6.6% in the year following a rally of 20% or more since 1928, slightly below the 7.6% return in all years, according to research from Bespoke Investment Group.Fund managers and strategists say there are several reasons to believe that the stock market will not continue on a path of notching double-digit annual returns like it did during the late '90s tech bubble."We're up a lot this year, but we had a historically bad 4th quarter last year," said Ryan Detrick, senior market strategist for LPL Financial.
"This isn't because of spectacular growth in the economy but the market realizing that we're not going to have a recession."The S-P 500 posted its biggest drop since the 2008 financial crisis last year as investors worried that the trade war between the United States and China would push the global economy into a recession.
The Federal Reserve's decision to change course in early January from its path of raising interest rates helped fuel the rally in the stock market this year.The Fed also helped spark a bond rally that pushed 10-year Treasury yields near historic lows and boosted dividend-paying stocks, further pointing to concerns about the strength of the US economy, said Liz Ann Sonders, chief investment strategist at Charles Schwab."There are not a lot of investors in the bond markets losing their shirts because the economy is running ahead of expectations," she said.The November presidential and congressional elections will likely weigh on politically sensitive sectors like healthcare as 2020 progresses, Sonders said, adding another market headwind that could prevent another string of outsized gains like the late 1990s.The year that was21 Dec, 2019For all the angst about trade wars, geopolitics and a sputtering and overly indebted global economy, 2019 might just be the best year investors have ever had.
Global markets in 201921 Dec, 2019The numbers are staggering.
Global stocks have piled on more than $10 trillion, bonds have been on fire, oil has surged almost 25 per cent, former crisis spots Greece and Ukraine have top-performed, and even gold has sparkled.Wall Street and MSCI's near 50-country world index have both stormed to record highs after 30 per cent and 24 per cent leaps.
Europe, Japan, China and Brazil are all up at least 20 per cent in dollar terms too.
Not exactly shoddy.A mirror image of 2018, when almost everything fell? Perhaps.
But there have been a couple of important drivers.One was China showing it was serious about stimulus for its $14 trillion economy.
The other was the screeching change of direction by the worlds top central banks, led by the Federal Reserve, which cut US interest rates for the first time since the financial crisis more than a decade earlier.Whereas a year ago the Fed was raising rates and earnings were rolling over, this year you have felt the Fed has been on your side, said James Clunie, who manages asset firm Jupiters Absolute Return Fund.They are willing to do QE4 at a stock market (record) high, which is extraordinary, he added, referring to Fed efforts to bring down a spike in money market rates that some suggest could presage a fourth round of quantitative easing asset purchases.
US Treasuries vs German Bunds21 Dec, 2019That Fed shift and the worldwide blizzard of rate cuts that have come since have fired bond markets up like a rocket.US Treasuries, the worlds benchmark government IOU, have made a whopping 9.4 percent after yields plunged as much as 120 basis points.
That followed a near 40 basis point fall the last quarter of 2018, after five quarters in which they had consistently risen.German Bunds Europes safest asset have had their best year in five years, making roughly 5.5 per cent in euro terms as the European Central Bank has reversed course too.
The yield on 10-year debt dropped below zero percent for the first time since 2016 in March and dived as deep as -0.74 per cent in September.
Performance of commodities21 Dec, 2019In commodities, oil has raced up almost 25 per cent following its best first quarter since 2009.
That, plus key dividend rule changes, has made Russias stock market the best in the world with a 40 per cent rise and also made the rouble a top three currency.Metals have had a more mixed time.
Copper is only 4 per cent higher after buckling badly when trade tensions flared in the middle of the year, and aluminium is down 2 per cent.
But palladium, used in car and truck catalytic converters, has boomed 55 per cent, while gold has had its best year since 2010 with a 15 per cent jump.A statistic likely to make most jaws drop is that Greek banks remember all that euro debt crisis and capital controls stuff a few years back? have been some of the worlds best-performing stocks this year.The countrys biggest lender Piraeus Bank (BOPr.AT) is up 250 per cent, as is smaller Attica Bank (BOAr.AT), helping make Athens Europes strongest bourse this year.But even those gains look skimpy in comparison to Californian video streaming darling Roko (ROKU.O), whose shares have risen 440 per cent this year.
Fangtastic21 Dec, 2019Tech has remained top more broadly.
Apple (AAPL.O) may just have lost its crown as worlds most valuable firm to Saudi Aramco but it can console itself with its 77 per cent leap this year.Facebook (FB.O) has surged 57 per cent, Microsoft (MSFT.O) 53 per cent, Google (GOOGL.O) 30 per cent, Netflix (NFLX.O) 24 per cent and Amazon (AMZN.O) 19 percent.
Chinas tech sector .CSIINT is right in mix too with a 64 per cent rally and online behemoth Alibaba (BABA.K) up 53 per cent.Cryptoassets have been typically wild.
Bitcoin was up over up 260 per cent in June but it has been hauled back to around 85 per cent.Riskier high-yield debt, corporate bonds and local currency emerging market bonds and have all brought in between 11 per cent-14 per cent while Ukraines dollar bonds and Greeces euro bonds have piled on over 30 per cent.It is just a great year for the asset class, said Pictet emerging market debt portfolio manager Guido Chamorro.It has been a relentless rally across the board over the last couple of months and it is possible that it continues into next year.
"You had a bunch of strong years back then because we were in the midst of a tech bubble and there was no cap on valuations.
Now we have real legitimate companies but there's not the same sign of excess valuation," she said.Few on Wall Street expect a bear market in 2020.
There are few signs of a recession looming in the year ahead, while the market has seemed unfazed by issues such as President Donald Trump's impeachment or ongoing trade tensions, said Jonathan Golub, chief US equity strategist at Credit Suisse Securities."Given historically low interest rates and risk premiums, we believe valuations have further to run," he said.
He added that he expects the S-P 500 to end 2020 near 3,425, a roughly 7% gain from its Thursday trading price.Investors may realize larger gains by investing in smaller companies next year, said Steven Chiavarone, a portfolio manager of the Federated Global Allocation fund.Large-cap stocks in the S-P 500 are over-valued compared with the smaller companies in the Russell 2000 index, he said.
At the same time, the Russell 2000 slightly under-performed the larger index this year by posting a 23.2% gain, leaving it primed for a "catch-up trade" given that smaller companies tend to benefit more from low interest rates, he said."We think there's a chance that you will see upside surprises from earnings next year and that could draw investors back to an asset class they've been overlooking," said Chiavarone.