Key Investment Perspectives: January 2020
A solid December ended an outstanding year for equities around the world. The US equity market soared 31% in 2019, while developed country ex-US stocks and emerging market equities rose 22% and 20%, respectively. And solid returns weren’t limited to stocks: Real estate, commodities, high-yield bonds, and investment-grade fixed income all posted strong double-digit gains for the full year.
In contrast to 2018 when nothing seemed to work, 2019 was the year when everything worked. Fed and other central bank rate cuts, a trade truce, an inverted yield curve that eventually turned positive, a new round of Fed balance sheet expansion, a robust labor market, and long-overdue clarity on Brexit helped lift all risk assets.
In the January edition, we address issues that are central to investors as we enter the new year, specifically:
- Our 2019 tactical moves and 2020 outlook.
- Stock market performance during presidential elections.
We also review asset class performance and our current tactical asset allocation recommendations in this issue.
- Global Equities: In the US, the Russell 1000 Growth Index was up 10.6%, easily outpacing the gain in the Russell 1000 Value Index of 7.4%. Not much separated large and small cap stocks in December or the fourth quarter. Developed international markets (+3.7%) rallied in December to outperform US stocks, while emerging markets (+7.0%) were the best-performing equity markets in December. We now maintain neutral allocations to both developed ex-US and emerging markets as we begin to see signs of economic stability in several developed markets and the abatement of trade headwinds.
- Fixed Income: US Treasuries were down 56 bps in aggregate in December, with the long index down (-2.8%) while the intermediate index was flat. Within credit, high-yield bonds (+2.0%) outperformed investment-grade fixed income (+0.3%) in December. We continue to maintain a neutral duration within our Treasury portfolios and remain underweight high-yield bonds and overweight higher-quality investment-grade issues.
- Tactical Allocation: Using our Dynamic Allocation Research Tool (DART), we continue to maintain a balanced risk posture in our tactical asset allocation. However, in the last several months, DART has been recommending a shift away from the US in favor of emerging and developed ex-US markets. In December we made this shift from an overweight US position to a neutral stance across all geographical equity regions.