Q4 2019 Insights

February 6, 2020 · Insights

How did the markets do?

Global equities exhibited strong gains during the fourth quarter, adding to an already robust performance for 2019.
A return to more accommodative interest rate policy, a pending “phase one” trade deal between the U.S. and China, and receding recession fears buoyed investor sentiment.
In U.S. markets, growth in corporate earnings continued its slow decline, pressured by rising wages and input costs, yet the backdrop of a tight labor market and a strong consumer eased market anxiety. Developed non-U.S. and emerging market equity returns were strong as well, though not enough to match their U.S. peers.
Bond markets around the world were generally flat in the fourth quarter after accumulating significant gains during the first three quarters of 2019. In the U.S., the yield curve un-inverted as longer-term interest rates rose in response to diminishing recession fears, and the Federal Reserve cut short-term rates in October.

Global economic growth remains positive but sluggish. However, leading economic indicators are showing signs of improvement and estimates of global GDP growth are marginally higher for 2020.
A combination of extensive stimulus from central banks, a perceived de-escalation of trade tensions, and the solid financial position of households are helping reduce the risk of an immediate global recession.
Nevertheless, most major economies are in the late stage of the economic cycle, but we are encouraged by the fact that many late-cycle signals are notably absent (e.g. inflation, excessive leverage, housing bubbles, high commodity prices). More importantly for late-cycle economies, central banks remain ready and willing to help, not hinder.

During the 2010s, U.S. equities produced the best return versus all other major asset classes, returning an average 13.5% per year. While exhilarating for investors, we do not believe these kinds of returns are sustainable over the long term. Extraordinary monetary policy may extend them, but cycles still exist in the global economy, as well as in financial markets. The consensus opinion is that we need to be prepared for lower returns.
We remain cautious and prudent. We are taking gains from the most over-valued sectors and asset classes and re-deploying the proceeds into more attractively valued areas, with an emphasis on quality (i.e. strong competitive advantages and sustainable revenues).
Furthermore, we continue to rebalance portfolios to their long-term targets. We want to ensure (where appropriate) that clients remain exposed to equities (as they continue to offer greater expected future returns versus bonds), but that they also have full fixed income allocations to provide stability and meet any liquidity needs during volatile episodes.
Broad diversification serves as your best protection against an uncertain future. Our number one priority is to seek to protect our clients’ assets as much as possible against the permanent loss of capital, consistent with the guidelines established in each client’s Investment Policy Statement.

In the nearer term, global markets remain vulnerable to several sources of volatility this year, including any change in central bank policy, the persistent long shadow of existing (if not new) trade disputes, geopolitical flare ups, the general election in the United States, and any worsening of the coronavirus outbreak in China.