- Investors embraced a Goldilocks outlook as easier financial conditions reduced the risk of a recession in 2020, energizing animal spirits.
- Demand for U.S. assets is likely to remain strong in a low-growth, low-interest-rate world.
- We expect periodic volatility in the coming year as fundamental challenges remain unresolved despite positive headlines.
Returns across asset classes were almost universally positive in 2019, a stark contrast to the story of 2018. While strong returns early in the year were a make up for a dismal fourth quarter 2018, market action in the last quarter of this year was an unambiguous scramble for returns. The success of the Federal Reserve’s (Fed) mid-cycle adjustment convinced investors that they can have their cake and eat it too in the form of lower rates and strong stock returns. After a strong recovery in the first quarter, the S&P 500® struggled to sustain new highs during the second and third quarters of the year. The fourth quarter marked a definite breakout as the S&P 500® gained over 8%, led by cyclical sectors like technology and banks, as investors shunned income producers like REITs and utilities. The S&P 500® Index produced a total return of over 30% this year. Bonds delivered strong returns as well. Rates for long treasury securities fell by over 60 basis points during 2019. Credit spreads fell to near post-crisis lows. Investment-grade corporate bonds -- and high-yield bonds -- joined long treasuries in producing solid double-digit returns (14-15%). Even commodities joined the party, delivering a return of over 11% for the year.