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Wall Street to Your Street


2019 Market Review: Stocks Rebound, Bond Yields Sink, Economy Moderate Growth

Stocks in the U.S. and abroad closed out a strong year with a solid December. The S&P 500® was up 2.86% for the month, the NASDAQ index rose 3.54%, and the MSCI EAFE Index of developed-economy stocks in Europe, Asia and Australia climbed 3.16%.

For the year, the U.S. market posted its biggest gain since 2013. The S&P 500 Index was up 28.88% for the year, from 2,506.85 to 3,230.78. (It was up 31.49% including dividends.)

woman checking laptop at work

The NASDAQ was up 35.23% and the MSCI EAFE was up 18.44%.

The strong showing in the equity market represented a rebound from the poor performance in the fourth quarter of 2018. The market was buoyed by moderate economic growth and better-than-expected corporate earnings growth, although much of the equity growth was due to rising price/earnings ratios – a function of the decline in interest rates.

Bond yields moved up moderately in December for the second straight month, with 10-year U.S. Treasury bond yields rising from 1.78% at the November close to 1.92% at the end of 2019. For the year, however, bond yields were down 0.76%, due in large part to three rate cuts by the Federal Reserve.

Here are some other recent economic highlights, which are covered in greater detail later in this report (Exhibit 1):

  • Retail sales rise. Retail sales were up 0.2% from the previous month in November and 3.3% year-over-year, according to the U.S. Department of Commerce.
  • Employment growth continues. Employment growth averaged about 180,000 new jobs per month through the first 11 months of 2019.
  • Price/earnings ratios climb. Stock valuations continued to rise throughout the year, with the forward price/earnings ratio nearly matching the highest level in almost two decades.
  • Oil prices surge. After stagnant returns the past few months, oil prices finally moved up significantly in December.

Drilling down

U.S. stocks up

The S&P 500 rose 2.86% for the month, from 3,140.98 at the end of November to 3,230.78 at the December close (Exhibit 2). It was up 8.53% for the fourth quarter and 28.88% for the year. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)

The total return of the S&P 500 (including dividends) was 3.02% for December, 9.07% for the fourth quarter, and 31.49% for all of 2019.

The NASDAQ Index was up 3.54% in December, from 8,665.47 at the November close to 8,972.60 at the end of the year. It was up 12.17% in the fourth quarter and 35.23% for the year. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)

Retail sales rise

Retail sales were up 0.2% from the previous month in November, according to the Department of Commerce report on December 13. Total sales versus a year earlier were up 3.3%.

Motor vehicle sales were up 0.5% in November and 4.9% versus a year earlier.

The strongest growth area continued to be non-store retailers (primarily online), which were up 0.8% in November and up 11.5% from a year earlier.

Building materials were even for the month and up 0.4% from a year earlier. Department store sales continued to suffer due to the surge in online sales. They were down 0.6% for the month and down 7.2% from a year earlier.

Employment growth continues

U.S. employers added 266,000 new jobs in November, according to the U.S. Bureau of Labor Statistics Employment Situation Report issued December 6. The unemployment rate dipped slightly from 3.6% to 3.5%, which is near a 50-year low.

Job growth averaged 180,000 per month through the first 11 months of 2019, compared with an average monthly gain of 223,000 in 2018.

Average hourly earnings for all employees on private nonfarm payrolls rose by $0.07 in November to $28.29. Over the last 12 months through November, average hourly earnings increased by 3.1%.

Moderate GDP growth

Gross domestic product (GDP) growth was moderate through the first three quarters of 2019. GDP growth was 3.1% in the first quarter – rebounding from a slow fourth quarter of 2018– followed by more modest growth of 2.0% in the second quarter, and 2.1% in the third quarter, according to the U.S. Bureau of Economic Analysis. The lower growth rate in the second and third quarters was attributed to declines in both fixed investment and business investment.

All sectors positive for 2019

All 11 sectors of the S&P 500 had double-digit gains in 2019, with Information Technology leading the way with a gain of 50.29%. Among the leading stocks within that sector were Apple (AAPL), up 88.09%, Advanced Micro Devices (AMD), up 148.43%, and Lam Research (LRCX), up 118.09%.

Other leading sectors included Communication Services, up 32.69%, Financials, up 32.13%, and Industrials, up 29.37%. Other sectors with gains of more than 20% included Consumer Discretionary, Consumer Staples, Health Care, Materials, Real Estate, and Utilities.

For the month of December, Energy led the way, as oil prices rallied for the first time in several months. Energy was up 6.03% in December, but still trailed all other sectors for the year with a gain of 11.81%.

Exhibit 3 shows the results of the 11 sectors for the past month, past quarter and all of 2019.


Treasury yields up for the month but down for the year

The yield on 10-year U.S. Treasuries had a solid gain in December for the second straight month, but the yield is still well below its close of a year ago.

After ending November at 1.78%, the yield climbed to 1.92% at the December 31 close (Exhibit 4). But the yield is well off the 2018 closing rate of 2.68%, due in part to three rate cuts in 2019 by the Federal Reserve.

Corporate earnings edge up

Corporate earnings growth was modest through 2019, as tariffs and trade issues hindered the global economy.

The 12-month forward earnings per aggregate share of the S&P 500 moved up only 2.20% for the year (Exhibit 5). By comparison, in 2018, forward earnings were up 18.06%, aided significantly by a corporate tax cut and substantial corporate stock buyback polices.

For the coming year, we are projecting 5% to 10% earnings growth, based on projected GDP growth of 1.8% to 2.0%, along with about 2% inflation, and flat-to-marginal profit margin expansion. Although stock buybacks will still be significant in 2020, they will likely to be down from the past two years and will not provide that same buffer. Operating profit margins will be a key to getting to the top end of our earnings growth estimates – or beyond. But we expect little or no increase in stock valuations (price/earnings ratios or "P/Es"), which means that market gains should roughly mirror earnings per share growth (projected in the 5% to 10% range). Valuation multiple expansion to near 20 times earnings from its current P/E level of about 18 could add another 5% to 10% to our estimated market gain expectations in 2020.

As stock prices rose over the past year, so did valuations. After the forward S&P 500 P/E ratio closed 2018 at 14.4 – the lowest level since 2014 – it rose throughout much of 2019, closing the year at 18.18. As Exhibit 6 illustrates, the current P/E is at nearly its highest level since 2002.

The forward 12 months earnings yield for the S–P 500, which is the inverse of the P/E, ended the year at 5.50%, which is well below the 6.94% yield at the end of 2018 (Exhibit 7). The 12-month forward earnings yield can be helpful in comparing equity earnings yields with current bond yields. Although the yield has dropped nearly 1.5% over the past year, it is still significantly higher than the 1.92% market rate of 10-year U.S. Treasuries.

Dollar gains versus Euro but drops versus Yen

The Euro dropped 1.81% versus the dollar in 2019, as trade issues rattled the European economy (Exhibit 8).

Although the dollar moved up versus most of the major global currencies, it dropped 0.95% versus the Yen in 2019 (Exhibit 9).

Oil prices finally jump

After several months of stagnant prices, oil finally made a strong move in December (Exhibit 10). The price of a barrel of West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, moved up 10.68% in December to $61.06 after closing November at $55.17.

The price surge was due primarily to the consensus among analysts becoming more comfortable with continuing GDP growth. Another contributing factor was that the oil supply has been impacted by new OPEC cuts and decelerating U.S. production growth.

For all of 2019, oil prices recovered from a steep slump in the fourth quarter of 2018. After ending 2018 at $45.41, prices moved up 34.46% in 2019.

Gold prices climb

Although gold prices edged down in the fourth quarter, the precious metal still posted a strong year in 2019 (Exhibit 11). For the year, the price of gold moved up 18.87%, from $1,283.00 per ounce at the end of 2018 to $1,523.10 at the close of 2019.

International equities finish strong

Despite some weakness in the global economy, the MSCI EAFE Index ended the year on a strong note, with a gain of 3.16% for December and 7.81% for the fourth quarter. It was up 18.44% for all of 2019 (Exhibit 12).

What's ahead for the economy and the markets? See 2020 Market Outlook: Modest Economic and Market Growth Ahead by Mark Simenstad, Chief Investment Strategist

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