The opening of 2019 was clouded with significant uncertainty.
Fears of an economic slowdown triggered by trade and monetary policy had led to a decline in the markets for 2018 and a near bear market during the December 2018 lows. Analysts we relatively conservative in their estimates for the year and were quickly surprised by the upward momentum in the first quarter. With only two pullbacks of any significance during the year that were met with buyers coming into the markets quickly, 2019 finished the year with all three major indices posting big gains and all reaching new records at some point during the year. The gains were across all sectors, with technology taking the top spot up 48.04% and the weakest sector being energy, up 7.64%. Gold was higher on the year and emerging markets were up over 15% as well. The real surprise was in the bond market, as yields were down significantly for the year which means bond prices moved higher as well. Investors certainly had much to cheer about this year.
The help from the technology sector could be felt in the S&P 500 which was up 35.2%. Two tech giants, Apple and Microsoft, accounted for 15% of the S&P 500 returns and helped them each become trillion-dollar companies. It is important to bring some perspective to the size of the move. One thing that helped, which accounts for such strong performance, is the lows from which we started off the year. The steep selloff in December of 2018, represented a drop of nearly 20% from the peak set in the fall of 2018. The close of 2019, represents about a 10% increase from the 2018 high, which is close to the average return for the S&P 500 over 90 years of 9.8%.
The Dow Jones Industrial Average trailed the other two major indices finishing the year up 22.3%. The Dow is price weighted as opposed to market cap weighted like the S&P 500. The heaviest weight in the Dow is Boeing, representing almost eight percent of the index. With the negative headlines surrounding Boeing for most of the year, it was up only 3.3%. If the index was market cap weighted, based on the value at the beginning of the year, the return of the Dow would have been a whopping 39%. With energy, the worst performing sector, the 1.67% weight of Exxon Mobil did not have as large of an impact. For longer term perspective, Boeing has been a powerhouse returning 660% in the last 10 years compared to Exxon Mobil at 41%. Low gas prices cut both ways, giving relief to consumers that can spend more on other goods and services, but hurting the profitability of the oil industry on the other side. According to a study by JP Morgan, consumers will spend eighty cents of every dollar they save on gas. Over the last decade we have seen gas prices average as much as $3.68 in 2012 and as low as $2.25 in 2016.
The Nasdaq composite was up 35.2% for the year and is often referred to as the tech heavy index. This is due to the fact that the top 5 components, which are Apple, Microsoft, Amazon, Facebook, and Alphabet make up 36% of the index. The surprising thing about the return for the Nasdaq this year was that the top 10 performers were all biotech and pharmaceuticals, except one. This is one more glimpse into how broad the rally of 2019 really was. On December 26th the Nasdaq closed above 9000 for the first time. It took 16 months or 335 trading since the last milestone was hit in august of 2018. This is the largest index with nearly 3000 companies represented. Because of this it is often broken down into subsets, the most popular being the Nasdaq 100 which is 103 of the largest non-financial companies in the index. The components of this index represent 74% of the market cap of the full index.
Throughout the year there were three main topics driving the momentum and direction of the market on a daily basis: trade, the Federal reserve, and the economy. By the end of the year the House passed the United States-Mexico-Canada Agreement, which is Trump’s replacement of NAFTA. In addition, the Trump administration has come to a phase one trade agreement with China. This is unfortunately not the end of the difficult negotiations but has at least marked a pause in the trade war escalation and had a positive impact on markets. The Federal reserve, which was faced with the steep drop in financial markets to close out 2018 and then an inversion of interest rates in August, was quick to act and cut interest rates three times during the year. Although highly controversial, the shift in policy at the outset of the year is considered by many to be the underlying key to the strong performance in stocks this year. Additionally, the Fed said it expects to leave rates unchanged for 2020, giving investors clarity in addition to the historically low rates. As for the economy, it seemed that whatever negative turns the economic data took, it was offset by strong consumer spending. Unemployment remains at multi-decade lows, wages are rising, interest rates are low, housing continues its recovery and GDP continues to show an economy unwilling to breakout in either direction with continued slow and steady growth.
Outside of economic news, there are some interesting trends and headlines for 2019 that I have a few for any of you that are trivia buffs. New York and New Jersey both made the list of the top three states that people moved out of in 2019. Considering New Jersey had the top property tax rate and the highest per capita property tax collection in the nation, along with one of the top state income tax rates, it should be no surprise its residents are moving on. According to United Van Lines, the top destination in 2019 was Idaho. The primary reason cited for the move there was retirement. Idaho does not tax Social Security income and has no estate taxes. The top song of 2019 goes to Ariana Grande “Thank U, Next,” and the top grossing movie for the year was Avengers: Endgame. As with the passing of another year we also lost some special people last year as well. The sports world bid a sad farewell to Bart Starr and John Havlicek. The entertainment world lost Valerie Harper and Tim Conway, and the business world lost Paul Volcker and Lee Iacocca.
With little fanfare, the President signed into legislation the SECURE Act, the broadest piece of retirement legislation passed in 13 years. The most dramatic impact of the new law is on those at or near retirement. The new law will allow individuals to continue to contribute to an IRA beyond 70.5 if they are still working. It also moves the required minimum distribution age from 70.5 to 72, allowing retirees to defer income longer into the future. Perhaps the biggest change is the elimination of the “stretch” option with beneficiary planning for IRA owners. The new law, which became effective January of 2020, changes the treatment of non-spouse beneficiaries upon death of the IRA owner. Under the old law beneficiaries of an IRA had the ability to “stretch” the income from the IRA over their life expectancy. For children of IRA owners, it greatly reduced the tax of inheriting IRA accounts. The new law requires distribution of the account balance to non-spouse beneficiaries over 10 years. It should be on everyone’s list of New Year’s resolutions to review your current beneficiary designations and see if they should be updated!