From Our Investment Committee | Q4 2019 in Perspective
MODERNIST’S ASSET CLASS INVESTING PORTFOLIOS ARE STRATEGICALLY INVESTED WITH A FOCUS ON LONG-TERM PERFORMANCE OBJECTIVES. PORTFOLIO ALLOCATIONS AND INVESTMENTS ARE NOT ADJUSTED IN RESPONSE TO MARKET NEWS OR ECONOMIC EVENTS; HOWEVER, OUR INVESTMENT COMMITTEE EVALUATES AND REPORTS ON MARKET AND ECONOMIC CONDITIONS TO PROVIDE OUR INVESTORS WITH PERSPECTIVE AND TO PUT PORTFOLIO PERFORMANCE IN PROPER CONTEXT.
Global stock markets rallied to finish the year and rebounded from a mixed third quarter.
U.S. stocks performed well, but international stocks, led by small-cap stock performance, bounced back in strong fashion from the previous quarter. While we never know for sure what caused market prices to move, strong corporate profits during the holiday season, further interest rate decline, and a continued low unemployment rate all encouraged investor participation in the market.
For the quarter, U.S. stocks (as measured by the S&P 500 Index) gained 9.1%, and non-U.S. developed market stocks (as measured by the MSCI World Ex U.S. Index) gained 7.9%. Emerging market stocks (as measured by the MSCI Emerging Markets Index) gained 11.8%.
The U.S. Dollar Index, a measure of the value of the U.S. dollar relative to a basket of foreign currencies, decreased in the fourth quarter. Specifically, the U.S. dollar decreased by 3.0% compared to foreign currencies. Over the past 12 months, the U.S. dollar has depreciated 0.2%. The decrease in the dollar is a tailwind to non-U.S. investments held by U.S. investors.
U.S. interest rates fell during the quarter as the Federal Reserve implemented a 0.25% rate reduction to the federal funds rate. The Fed now targets a range of 1.50% to 1.75% for the federal funds rate. Because changes in interest rates and bond prices are inversely related, the decline in interest rates helped increase the quarterly return for many bond asset classes.
U.S. Economic Review
Positive economic growth in the U.S. continued in 2019’s fourth quarter. The unemployment rate continued to maintain its lowest level in 50 years with the November 2019 reading coming in at 3.5%.* Domestic inflation remains tame, as the Fed’s preferred gauge of overall inflation, the core Personal Consumption Expenditures (PCE) index, stayed below the central bank’s 2.0% target with a reading of 1.6% in November 2019. The final reading for third quarter GDP showed an increase in economic growth of 2.1%.
Financial Markets Review
Source: Morningstar 2020. Market segment (index representation) as follows: U.S. Large-Cap Stocks (S&P 500 Index), U.S. Value Stocks (Russell 1000 Value Index), U.S. Small-Cap Stocks (Russell 2000 Index), U.S. REIT Stocks (Dow Jones U.S. Select REIT Index), International Value Stocks (MSCI World Ex USA Value Index (net div.)), International Small-Cap Stocks (MSCI World Ex USA Small Index (net div.)), Emerging Markets Value Stocks (MSCI Emerging Markets Value Index (net div.)), U.S. Short-Term Bonds (BofA ML Corp&Govt 1-3 Yr TR), Global Bonds (FTSE WGBI 1-5 Yr Hdg USD).
Both U.S. and international stocks across small, large and value advanced during the quarter, whereas U.S. real estate investment trust (REIT) stocks were down for the quarter.
The weakening U.S. dollar boosted non-U.S. stock returns. During the quarter, international small-cap stocks were the best performing asset class while U.S. REIT stocks were the worst performing.
U.S. and global bonds continued performance from the previous quarter by posting positive results.
In the U.S., small-cap stocks outperformed large-cap stocks in all style categories. Value stocks underperformed growth stocks in all size categories.
Among the nine style boxes, small-cap growth stocks performed the best, and mid-cap value stocks experienced the smallest growth during the quarter.
In developed international markets, all nine style boxes were positive for the quarter.
International small-cap growth stocks were the highest performer. Similar to the U.S., small-cap stocks outperformed large-cap stocks across all styles.
Source: Morningstar Direct 2020. U.S. markets represented by respective Russell indexes for each category (Large: Russell 1000, Value, and Growth; Mid: Russell Mid Cap, Value, and Growth; Small: Russell 2000, Value, and Growth).
Source: Morningstar Direct 2020. International markets represented by respective MSCI World EX USA index series (Large: MSCI World EX USA Large, Value, and Growth; Mid: MSCI World Ex USA Mid, Value, and Growth; Small: MSCI World Ex USA Small, Value, and Growth).