economic perspective

January 2020


By Thomas Dillman

The year 2019 saw historic advances in the U.S. stock markets, with the Dow Jones Industrial Average hitting an all-time high of 28,645.26 on December 27. By January 15, 2020, the DJIA topped the 29,000 mark for the first time ever. With the bull market now well into its 11th year, Mutual of America Capital Management LLC explores some of the key reasons for the continued advances in the financial markets and provides an initial outlook for domestic and global growth in 2020.

During 2019, the S&P 500® advanced 29.3% on a price basis and 31% on a total-return basis (i.e., price return plus reinvested dividends), the second-best year of the decade and 13th-best in the history of the Index. All 11 sectors were positive, the best showing since 2010, with the technology sector gaining 48%. Growth stocks outperformed value stocks, while large-cap stocks outperformed small caps. The largest 50 stocks within the S&P 500, many of which are technology focused, outperformed the other 450 by 2.4 percentage points. Long-term Treasury and investment-grade bonds each finished up 14%. U.S. stocks outperformed non-U.S. stocks, particularly emerging-markets stocks.1 According to MSCI, almost all European, Chinese and Far East stock indexes showed double-digit advances; however, stock indexes in emerging markets showed mixed results.

Surprisingly, U.S. stocks with the highest foreign exposure outperformed those with only domestic exposure and were up 40% despite the trade war between the U.S. and China and weak global economic data. Stocks that showed high-dividend growth, high yield and strong share repurchases advanced by 30%, while high-quality stocks advanced 29%.2

Reasons Behind Strong Market Performance

The source of these extremely strong U.S. and global performance results was the market's anticipation of the diminishment of macroeconomic risks over the course of the year. As we stated in the December issue of Economic Perspective:

First, the Fed made clear in its December post-meeting announcement that there would be no further rate changes for the foreseeable future, contingent on the trend of future economic data. Second, British parliamentary elections yielded an overwhelming victory for Prime Minister Boris Johnson and his Conservative Party. This assured him the votes to push through Great Britain's exit from the European Union (Brexit) with or without a specific deal, ending a long-standing stalemate that created confusion, prompted many business to leave Britain and froze business decision-making both in Great Britain and in Europe. And third, the Trump administration scored a trifecta of wins on trade, including: an agreement with House Democrats on the revised North American Free Trade Agreement (NAFTA), now called the United States-Mexico-Canada Agreement (USMCA); the completion of a "phase one" trade agreement with China that rolls back some U.S. tariffs in exchange for increased agricultural purchases from China, as well as commitments on intellectual property rights, forced technology transfer, currency markets and enforcement mechanisms; and, the effective emasculation of the World Trade Organization's trade conflict appeals process by refusing to approve new appointments to the court. Also, little noticed in the midst of these major announcements, was the agreement between Democrats and Republicans on a budget for the current fiscal year, avoiding the bipartisan brinksmanship typical of budget negotiations in the past that led to partial government shutdowns.

The market advance also accelerated during the fourth quarter of 2019 despite heightening geopolitical tensions, as well as strong poll results for two liberal Democratic candidates – Bernie Sanders and Elizabeth Warren. In addition, domestic and global economic data remained weak, despite signs that the slowdown was bottoming. Finally, prices rose while earnings remained flat for the year. In other words, a rising price-to-earnings ratio (P/E's) was the exclusive driver of performance last year. P/E's expanded because of investor anticipation of positive outcomes on the macro factors discussed above.

Fears of a Recession Diminish

While the recent economic data remains on the weak side, there are indications that last year's deterioration has bottomed, as discussed in the last several issues of Economic Perspective. Most global manufacturing ISM Manufacturing PMIs stopped falling and even began to rise in November and December, although the U.S. and Germany were significant exceptions. In the case of the U.S., the PMI for services PMI remained well above the 50 level, which separates positive and negative growth trends. Given that two-thirds of the U.S. economy is service driven, supported by the strong Gross Domestic Product (GDP) contribution from consumer spending, the 2019 slowdown in manufacturing was, and still is, not likely to trigger recession domestically.

Furthermore, U.S. unemployment remains at historical lows, average wage gains actually decelerated (aiding corporate margins), inflation is expected to remain well contained and interest rates are expected to remain low. China, the second-largest economy in the world, reported strong fourth-quarter export and import growth, rebounding from the impact of prior implementations of U.S. tariffs. U.S. GDP growth seems to have returned to a longer-term 2.0% growth trajectory, while Europe is beginning to recover from its downturn and China is stabilizing. With the major macro risks diminishing and global growth settling into a modest but positive trend, recession fears have waned.


The current consensus outlook is that domestic and global growth will remain positive for an extended period and that earnings will begin to advance again. All of these factors explain the continued advance of stock prices, despite high valuations.

There is one caveat to the S&P 500's record-breaking 2019 performance – namely, that it followed a 7.4% price decline for the full year of 2018 due to the 14.6% correction in the fourth quarter of that year. From the index's peak on September 20, 2018, the market was up only 10.2% on a price basis through December 31, 2019. Over the last two calendar years (beginning December 31, 2017, and ending December 31, 2019), the index is up "only" 20.2% on a price basis versus 2019's price advance of 29%. In other words, the S&P 500 advanced about 10% per year over the last two years, not bad by any means, but much closer to the average long-term price returns of about 7% per year. The point is that 2019's performance, while outstanding, should be viewed in the longer-term context, which reveals that stock performance is variable and even volatile, but positive over time. The implication for investors is to stay invested but diversify to mute volatility and reduce risk in line with personal risk tolerance.

Thomas Dillman is the former President of Mutual of America Capital Management LLC.


Savita Subramanian, Bank of America Global Research, "US Performance Monitor," January 2, 2020.



Past performance is no guarantee of future results. The index returns discussed above are for illustrative purposes only and do not represent the performance of any investment or group of investments. Indexes are unmanaged and not subject to fees or expenses. The index returns above reflect the reinvestment of distributions. It is not possible to invest directly in an index.

The views expressed in this article are subject to change at any time based on market and other conditions and should not be construed as a recommendation. This article contains forward-looking statements, which speak only as of the date they were made and involve risks and uncertainties that could cause actual results to differ materially from those expressed herein. Readers are cautioned not to rely on our forward-looking statements.

Mutual of America Capital Management LLC is an indirect, wholly owned subsidiary of Mutual of America Life Insurance Company. Securities offered by Mutual of America Securities LLC, Member FINRA/SIPC. Insurance products are issued by Mutual of America Life Insurance Company.

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