Global capital markets demonstrated remarkable resilience in 2019, rebounding from a severe decline that occurred in late 2018. Despite starting the year on an uncertain note, they ultimately shrugged off a stream of negative headlines and nervous sentiment to conclude in a robust recovery. The fourth quarter of 2019 capped off most of the broad-based gains across equity and income asset classes.
There are three factors that contributed most for the tremendous rise of the US markets:
- Fed rate cuts: As recession and trade war risks were rising, the Federal Reserve delivered three 25 basis point rate cuts. This provided assurance for the economy, and thus boosting the equity markets.
- Economic growth: The strength of the US consumer boosted U.S. household spending which positively affected all global markets. Unemployment is at a 50-year low, wages are rising nicely, and workers have flexibility to change jobs. Therefore, U.S. spending is higher. Since U.S. consumer trends influence the global economy, this is having a positive impact abroad.
- Decreasing U.S.-China trade tensions: in the last couple of months, the signals sent by Washington and Beijing were relatively more positive which helped capital markets.
Canadian equities also did well in 2019, with supportive business conditions and strong commodity prices boosting results for most sectors. The benchmark S&P/TSX Composite Index climbed 3.2% in the fourth quarter, capping off an impressive 22.9% gain by year end. Overseas, markets showed a similar trajectory, with European developed market equities advancing amid an environment of easy monetary policy and Brexit uncertainty. The markets in Asia also posting positive results for the fourth quarter and the year as well.
Regarding the market’s above-average valuation, we think the low interest rate environment makes it more tolerable. Investors have historically been willing to “pay up” for every dollar of earnings when rates and inflation were low. The S&P 500 is now trading at 18.4x RBC Capital Markets’ 2020 earnings forecast of $174 per share versus a long-term average of 16.2x. While we’re still not overly bothered by the elevated valuation, we see less room for it to expand in 2020 and acknowledge the U.S. valuation is stretched vis-à-vis other developed markets.
From January 1st, 2019 to December 18th, 2019, the returns for some of the main markets were the following:
US: 27%
Europe: 23%
China: 21%%
Canada: 19%
UK: 14%
Source: RBC Wealth Management, Global Insight