By John Packs, Senior Investment Officer, VALIC Funds
The fourth quarter rally in equity markets brought a strong conclusion to exceptional returns in 2019. The primary factors supporting this were actions by the Federal Reserve (the “Fed”) and an initial trade agreement between the U.S. and China.
Following a rate cut in October, the third of 2019, it appears clear it would take a dramatic slowdown in economic growth for another rate reduction or a significant increase in inflation for the Fed to increase rates. This, combined with the significant amounts of short-term liquidity the Fed added to the market, gave the markets comfort that the Fed is prepared to act to support any market dislocation.
Overseas, the Chinese central bank cut short-term funding rates in November for the first time since 2015. These cuts were precipitated by the global slowdown in the manufacturing sector exacerbated by the U.S.-China trade war. The December announcement of the two sides reaching a Phase 1 agreement was viewed very favorably by the market.
In the U.S., this weakness in the manufacturing sector has been offset by strong consumers. Despite a middle of the road jobs report in December, the U.S. economy appears on track for 2% growth.
The S&P 500 returned 9.07% for the quarter and small caps, as represented by the Russell 2000 Index, returned 9.94%. The MSCI EAFE Index returned 8.15%. Bond returns were mixed for the quarter. The Bloomberg Barclay’s Aggregate Bond Index was essentially flat at 0.18%. The FTSE High Yield Market Index returned 2.83%, but the Bloomberg Barclay’s Treasury Long Index returned -4.12%.
The S&P 500 Index is representative of leading companies in leading industries reflecting the U.S. stock market. Russell 2000 Index measures performance of 2,000 small-cap companies in the Russell 3000 Index, comprising 3,000 biggest U.S. stocks. Morgan Stanley Capital (MSCI EAFE) Index tracks performance of 900 securities listed on stock exchanges of 21 EAFE countries. Bloomberg Barclays Capital U.S. Aggregate Bond Index measures investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. FTSE High Yield Market Index measures the performance of high-yield debt issued by corporations domiciled in the U.S. or Canada. Bloomberg Barclay’s Treasury Long Index measures the performance of public obligations of the U.S. Treasury with maturities of 10 years and greater, including securities roll up to the U.S. Aggregate, U.S. Universal, and Global Aggregate Indices. Indexes are not managed, have no identifiable objectives and can’t be purchased.
Past performance does not guarantee future performance of any investments. This commentary is provided for general informational purposes only and does not represent a recommendation or solicitation for any financial transaction.
Securities and investment advisory services offered through VALIC Financial Advisors, Inc. (VFA), member FINRA, SIPC and an SEC-registered investment adviser.