- 2019 was another year of strong stock market gains despite an escalation of the trade war between the U.S. and China and industrial production experiencing tough times across the board. Investor sentiment was lifted by headway in Sino-U.S. trade relations and a relatively strong economy in the U.S., as well as monetary easing policies by the U.S. Federal Reserve and the European Central Bank.
- In the context of mutual fund flows, the picture does not look at all surprising. Total long-term withdrawals between the start of 2019 and November 20 stood at $74 billion. While equities saw outflows of nearly $300 billion during the period, bonds enjoyed inflows of nearly $270 billion. From equities, only emerging markets saw positive inflows at $1.1 billion.
- For bond funds, the picture was mixed. Investment-grade bonds enjoyed inflows of $136 billion, while high yields were pummeled, experiencing withdrawals of more than $28 billion. Overall, taxable bonds enjoyed inflows of $187 billion while municipal bonds registered $82 billion in inflows.
- Facing a weakening economy at home and a trade war that sapped investor sentiment, the U.S. Federal Reserve slashed interest rates three times this year, providing support for the equity market. However, the Fed indicated it will keep rates on hold for a while but made clear a hike was unlikely anytime soon.
- The U.S. labor market appears to be in great shape, with the unemployment rate continuing to head down this year to hover near record lows. The U.S. economy continued to add jobs at a strong pace, although the speed was somewhat weaker compared to the previous year. One sign of concern was the low inflation rate, which has been hovering below 2% and was one key reason that prompted the Fed to act. Indeed, the Fed indicated it would consider raising interest rates when it would “see a really significant move-up in inflation that’s persistent.”
- In Europe, the economic picture was worse than the U.S., as the region is heavily exposed to trade relations with China. Germany’s manufacturing purchasing managers’ index has been in contraction territory since February, while Europe-wide PMI moved below the level indicating expansion in March and has remained there since. European inflation continued to drop and is now at 0.7%, well below ECB’s target of 2%.
- As a result of declining inflation and economic activity, the ECB eased its monetary policy by resuming its bond-buying activity at a rate of 20 billion euros per month for ‘as long as necessary’ and lowered interest rates charged to banks for parking their money with the ECB to a record low level of negative 0.5%. Markets further received a boost on news that Mario Draghi will be replaced by Christine Lagarde as ECB future boss. Lagarde, the former chief of the International Monetary Fund, is expected to maintain the bank’s ultra-loose monetary policy.
- Japan has continued to struggle with low economic growth despite the Bank of Japan promising additional monetary easing and the corporate world undergoing some structural changes with additional scrutiny from investors. Governor Haruhiko Kuroda promised to lower borrowing costs if necessary, particularly as a recent consumption tax hike risks derailing feeble output expansion.
- In China, the economic growth has declined to the lowest level in 30 years in the third quarter, as the industrial sector suffered a severe blow from the trade war with the U.S. However, the Chinese central bank said it would not roll out any stimulus measures for now, as the expected 2019 growth rate of 6.2% is still within its range.
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- Equities outperformed bonds this year, although both asset classes recorded positive performance.
- Vanguard’s S&P 500 index fund (VFINX) gained 25.5% for the year, although its performance was close to the broad market and technology stocks.
- Vanguard’s total bond index fund (VTIBX) advanced nearly 7% for the year, a lower but much more stable performance.
- In sectors, technology equities posted the best performance from the pack, while materials stocks clung to a tepid 1.1% gain.
- T.Rowe’s global technology fund (PGTIX) surged more than 30% for the year, the best performance from the pack but close to the retail equities fund, which enjoyed a recovery this year following a multi-year struggle.
- Fidelity’s chemicals sector fund (FSCHX) was the weakest performer, as it has been plagued by a host of issues, including the trade war, weak commodity prices, floods, and lawsuits from environmentalists and shareholders.
- All foreign funds were up this year, although none of them beat U.S. benchmarks.
- European equities fund (VEURX) were surprisingly the best performer from the pack, with an advance of 16.5%.
- At the other end of the spectrum is Matthews Chinese equities fund (MICDX), which rose just 7.6%, a performance not far from Latin America. The trade war with the U.S., combined with slowing economic growth and shrinking industrial profits, took a toll on investor sentiment.
Major Asset Classes
- The performance of asset classes was widely divergent.
- T.Rowe’s mid-cap fund (PMEGX) gained nearly 31% this year, by far the best performance from the pack.
- Meanwhile, Direxion’s commodities fund (DXCTX) lost nearly 10% this year, representing the worst performance from the bunch.
The Bottom Line
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