2019 stock market report

After a down 2018, US stocks bounced back in a big way last year.

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Key takeaways

  • Stocks, bonds, oil, and gold broadly rebounded in 2019.
  • Among US stocks, the technology and communication services sectors were the biggest winners. Energy was once again the worst-performing sector, although it finished positive for the year.
  • Opportunities may be found in 2020, but manage your risk.

After global stocks came back to earth in 2018, 2019 was a different story. The MSCI World Index gained 24% last year. US stocks, as measured by the S&P 500, were even stronger, adding 28% (see The bull market for US stocks could turn 11 in March chart).

US stock price gains were driven in large part by multiple expansion and more support from the Federal Reserve in the form of 3 rate cuts during the year. While trade wars loomed over the market all year, the S&P 500 still managed to record its best year since 2013 on a price-return basis.

While the chart above shows a bullish long-term trend, many of the potential risks that existed last year remain at the outset of 2020. These include a still maturing business cycle and elevated valuations relative to historical levels. With that said, there are several reasons to be cautiously optimistic and new opportunities to consider.

Bulls owned 2019 (and the decade)

It was mostly a good year for investors around the world, as developed international and emerging markets strengthened. Bonds (9%), gold (18%), and oil (27%) all rebounded from declines in 2018.1

The US market marked a big milestone in 2019, becoming the longest running bull market ever. Fueled in large part by government spending, historic support from the Federal Reserve, and a dramatic rebound in corporate earnings, the bull market will look to turn 11 in March.

All 11 US stock market sectors finished in the green during 2019, after health care and utilities were the only sectors to have a positive 2018 (see 2019 sector performance table). Moreover, every sector except energy experienced double-digit gains, with technology and communication services leading the way, surging 48% and 32%, respectively.

Looking at a longer time period, the 28% gain last year helped push the 2010s' decade-long gain to its 17th highest 10-year cumulative price return on record (as measured from January 1, 2010 to December 31, 2019).2 The high-water calendar year mark during the 2010s occurred in 2014, when US stocks gained 30%. Growth stocks outpaced value stocks over the decade by 234% to 145%, while small-cap returns (208%) bested both large-cap (189%) and mid-cap returns (184%).2 Of course, there was dispersion within market cap, style, and sector.

Sector performance and earnings

An important trend to watch when assessing sector performance in recent years is how closely (and how differently) it has varied from underlying earnings. For example, the price of the S&P 500 has risen roughly in line with the earnings-per-share change for the index over the past 2 years (see Performance and earnings-per-share change by sector chart). This makes sense: Price should follow earnings.

However, other sectors (excluding consumer discretionary, consumer staples, and health care) have not closely tracked their earnings-per-share change. For example, technology stocks—the best performing sector in 2019 and over the past 2 years—have risen more than 45% since the beginning of 2018, despite a less-than-25% increase in earnings-per-share change. The energy sector has declined by more than 10%, despite a nearly 25% increase in earnings-per-share change.

2020 in focus

The key risks that investors should be prepared for at the outset of this year include:

  • Trade wars—There's evidence that the uncertainty surrounding global trade wars is slowing business investment and global growth.
  • Political risk—In addition to the ongoing impeachment process (which appears to have had little, if any, impact on markets, but is worth monitoring nevertheless), 2020 features several major elections around the globe. The main events are likely to be the 2020 US presidential and congressional elections.
  • Relatively high valuations—The S&P 500 continues to trade at a significant premium to both its mean and median historical price-to-earnings. Yet this has been a consistent feature for much of the latter half of this decade's bull market, and there may be alternative ways to view current market valuations.

You may also want to factor in any other concerns that may be relevant to your investment plan, such as the potential for corporate earnings to face tougher comparables in 2020 versus 2019 as well as the possibility of higher inflation eating away at profits and investment returns.

With these factors in mind, Fidelity's 2020 sector outlook highlights 5G, industrial internet of things, batteries, renewable energy, and more as interesting investable themes in 2020. Fidelity's 2020 equity outlook also highlights opportunities in materials and financial stocks among small-caps, asset management, transportation, and managed care among mid-caps, and undervalued stocks among large-caps.

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