Global stock markets were on fire in 2019, adding more than $17 trillion in total value, according to Deutsche Bank calculations. This means the value of global equities is now more than $85 trillion and is fast approaching $90 trillion. The large climb for the world markets has been largely dominated by the US. Its rally has been broad with major stock indices making huge gains, thanks in large part to the success of key technology stocks. The S&P 500 finished with an increase of 28.9% for the year, and the Dow Jones Industrial Average rose more than 22%.
Apple and Advanced Micro Devices were the biggest winners in the US’s two major stock market indices. Apple led the way for the Dow Jones Industrial Average, gaining over 85%. For the S&P 500, it was Advanced Micro Devices that took the crown, rising more than 145% since the start of January 2019 for the biggest gain in that benchmark.
This certainly has been an incredible year and decade for the stock market, the longest bull market on record. But should investors expect the same into the new decade?
A look at what moved the markets in 2019 may provide some intuition as to whether the same drivers will be sustainable to lift the markets higher into 2020 and beyond.
The year started with the impetus of strong US consumer demand, amplified with record low levels of unemployment (50-year low of 3.5%) and worldwide monetary policy pivoting from tightening to easing. The pace of rate cuts accelerated during the year globally, leaving 2019 characterised by a rapid pace of pre-emptive rate cuts in response to the prospect that global growth will slow to the weakest level since the global financial crisis. Later developments saw the effects of the US-China trade war and Brexit in the UK.
As part of the US-China trade agreement, Beijing agreed to buy $200 billion of US products over the next two years from the manufacturing, energy, agriculture and services sectors. In return, the US will reduce tariffs on Chinese goods. About $380 billion of Chinese goods will still be taxed in an effort to force Beijing to negotiate a broader trade agreement.
The skinny trade deal further de-escalates the nearly two-year trade war that has hurt growth in the world’s two largest economies. China’s economy grew at a 6% rate in the third quarter, its weakest since recordkeeping began in 1993. Economic expansion in the US slowed to 2.1% in the July-to-September period, down from 3.1% at the beginning of the year.
The UK prime minister stunned political pundits by leading his Conservative Party to score one of the country’s most dramatic electoral victories in decades. The result is a vindication of Johnson’s strategy to campaign on a single promise to “get Brexit done”. This has given some clarity to Brexit with a date for the UK’s departure from the EU currently set for 31 January 2020.
The future is always uncertain or rather unknown and no one can profess to have the crystal ball to predict it. That said, a retrospective analysis should assist in formulating forward-looking opinions.
Wall Street’s forecasts for 2020 make for fairly glum reading. But the real horror show lies in the smattering of long-term forecasts, which indicate that the coming decade could be as terrible for investors as the last one has been terrific. After the pain of 2018, 2019 has been a welcome healing process for investors. Pretty much everything has notched up robust gains, helped by the dovish tilt of central banks, and, more recently, hopes that the global economic slowdown has been halted.
This, however, means more demanding valuations for new investors. The price-to-earnings ratio for US stocks constructed by Nobel Prize-winning economist Robert Shiller, which adjusts for economic cycles, has climbed back to 30, roughly twice its long-term average. Meanwhile, over $11.5 trillion of bonds are trading at negative yields.
Morgan Stanley estimates that a classic investor portfolio, made up of 60% US equities and 40% bonds, will return just 4.1% annually over the next decade, a performance so muted it has rarely been worse in the past seven decades. A European 60-40 portfolio is expected to return a mere 3.9% a year.
Market expected returns have looked low before, only to be ‘bailed out’ by central banks’ easing policy which has pushed prices up ever higher. But that practice just pulls future returns into the present, some analysts say. While this may have ensured that the past decade was wonderful for investors, prospective returns now look far skinnier. Moreover, interest rates cannot move much lower, taking away one of the biggest fillips enjoyed by financial markets over the past three decades.
Global demographics are changing, with baby boomers retiring in increasing numbers and sapping economies of their vim. Open trade and globalisation are also in retreat. Corporate taxes are likely to rise, and minimum wage increases are dominating the political agenda. This may be good for many people, but is likely to hurt market returns.
The big question for 2020 is whether there are any pockets that look at least somewhat attractive. Or if the US-China trade deal along with clarity on Brexit will be able to boost global growth. Without certainty for a growth stimulus, many investors are piling into unlisted investments such as private equity and real estate in search of positive returns. On the public markets, emerging market equities, UK equities and dollar-denominated emerging-market debt, despite the idiosyncratic risks, are becoming relatively attractive.
Richard Maparura, CFA, is a portfolio manager at Butterfield.
Sources: Financial Times, BBC News, Fox Business, CNBC
Disclaimer: The views expressed are the opinions of the writer and whilst believed reliable may differ from the views of Butterfield Bank (Cayman) Limited. The Bank accepts no liability for errors or actions taken on the basis of this information.