4Q2019: Summary of the Quarter, Year, and Decade
With the exception of real estate investment trusts, the fourth quarter was a very good one for stocks. U.S. equities completed their best year since 2013, and if the decade of the 2000s was the “lost decade”, then the 2010s could be considered the “found decade”. In another reversal of the 2000s, the dominant asset class of the 2010s was U.S. large growth, largely driven by information technology. International and emerging markets were the laggards, but with far lower valuations than the U.S., it would be quite surprising to see that happen again in the next decade.
The table below summarizes the estimated returns for various asset classes based on the performance of Vanguard index funds. Please note that they do not necessarily represent the returns of the funds or portfolios utilized by Clarity Capital Advisors.
Asset Class Ticker Used 4Q/2019 Return 2019 Return 10-Year Return
US Total Market VTSAX 9.0% 30.8% 13.4%
US Large Growth VIGAX 9.9% 37.2% 14.6%
US Large Value VVIAX 8.2% 16.3% 12.5%
US Small Growth VSGAX 9.4% 32.8% 13.7%
US Small Value VSIAX 7.2% 22.8% 11.9%
US Real Estate VGSLX 0.6% 28.9% 12.0%
International VTMGX 8.4% 22.1% 5.7%
Emerging Markets VEMAX 11.3% 20.3% 3.5%
US Bond Market VBTLX 0.0% 8.7% 3.7%
US TIPS VAIPX 0.6% 8.2% 3.3%
(Source: www.vanguard.com. If fund returns were not available for the 10-year return, then equivalent ETF returns were used instead.)
As expected, the House voted to impeach President Trump, but we do not yet know if or when a Senate trial will occur. Either way, it’s all but certain that Trump will be the Republican candidate in the 2020 election. Our favorite barometer, the prediction markets where real money is at stake, are fairly evenly split between Trump and the Democratic nominee, whoever that might be. More importantly, the markets predict that the Republicans will maintain control of the Senate while the Democrats hold on to their majority in the House, so whoever wins will probably not be able to implement a sweeping legislative agenda. Both parties have agreed that deficits don’t matter, and neither party wants to be associated with a government shutdown. The most recently passed budget included the SECURE (Setting Every Community Up for Retirement Enhancement) Act which we detail here.
Geopolitically, we begin 2020 with a bang, not a whimper. Tensions between the U.S. and Iran have just increased by an order of magnitude with the targeted assassination of Qasem Soleimani, the leader of the Iranian Revolutionary Guard. As of this writing, Iran has vowed “severe revenge” but has not disclosed any further details. This morning, President Trump announced a deployment of an additional 3,000 U.S. troops to the Persian Gulf. Meanwhile, we are still waiting for Kim Jong-Un’s Christmas gift.
One apparent piece of good news is the new trade agreement with China that will be implemented in stages. You may recall that trade disputes with China have been linked to much of the market volatility in recent years. The trade situation in North America is also looking better with the House passage of the USMCA trade agreement as the successor to the flawed NAFTA agreement.
We began the decade emerging from the Global Financial Crisis with pervasive uncertainty, and we end it with a substantially appreciated value for US equities. A good measure of this appreciation is the change in the Shiller cyclically adjusted price-to-earnings ratio (from 21 to 31). This change in valuation accounts for 4% of the 13.4% 10-year return of US equities. The difference in price-to-earnings ratios among U.S., international, and emerging markets argues for global diversification.
Although it was technically inverted at different points in the year, we ended the decade with a fairly flat yet slightly increasing yield curve. The bond market forecast of inflation is about 1.8% for the next decade which is very close to what it was in the prior decade (1.7%). To that, we should add a cautionary note that each person has his/her own rate of inflation based on the goods and services consumed.
One important monetary development during 2019 was the Federal Reserve’s intervention in the overnight (repo) lending market in a complete reversal of the quantitative tightening policy it had implemented in the prior two years. Ironically, this was exactly what President Trump had repeatedly demanded via Twitter.
While we will not engage in the fool’s errand of forecasting 2020 economic events or market returns, we do believe it worthwhile to consider Vanguard’s recent warning in their 2020 outlook: “With ongoing trade tensions, geopolitical uncertainty, and unpredictable policymaking becoming the new normal, Vanguard expects U.S. growth to decelerate below trend to around 1% in 2020, with the risk of recession still elevated.”
We wish all our clients and retirement plan participants a healthy and prosperous decade.