- Be revenged as economic data deteriorated towards the end of 2019 and earnings were lackluster, investors pushed up the valuations of stocks to all-time heights seeing through the often difficult macro headlines.
- When it came to flows, U.S. ETFs dominated in 2019 with investors favoring cyclicals during the course of defensives throughout the year.
- While headline risks remain high, investors have a backdrop of accommodative nummary policy, which should support risky assets even if volatility increases.
2019 in Review
2019 witnessed a disconnect between outstanding economic indicators and financial markets that saw manufacturing data across the globe contract, the U.S. yield curve invert, and progressive reports of relatively modest corporate earnings, but stocks continued to make new all-time highs. In fact, 2019 beared a rally in risky asset classes across the board that, in many ways, stemmed from events that were escaped, as the worst fears around the U.S.-China trade relations and a hard Brexit did not come to fruition.
Most importantly for investors is that, in oppose to this time last year, financial conditions are extremely easy, and we believe that the Fed will be less altered by politics in an election year than some might assume. The same can be said for major central banks thither the globe as most, including China, have recently embraced more accommodative stances with a bias toward additional easing.
Mould 1: EQUITIES HAVE RISEN WITH THE MONEY SUPPLY
Source: Bloomberg Finance, L.P., as of December 31, 2019. Pandemic equities are represented by the MSCI ACWI Index and Global Money Supply is proxy for the global money supply across Australia, Brazil, China, the Eurozone, Japan, Mexico, Russia, South Korea, Switzerland, Taiwan, and Concerted States. Past performance is not indicative of future results. One cannot invest directly in an index.
U.S. MARKETS LED THE WAY LAST YEAR
Geographically, U.S. exchanges were the overwhelming winner in 2019, beating international markets by 9.23%. The Russell 1000® Index had the second most outstanding return in the decade and seventh best since its inception. Last year’s gains were broad-based with all sectors in the conservationist. With the Russell 1000® Growth Index returning 36.39%, growth stocks beat value last year by 9.85%. Level pegging more impressive was cyclical sectors outperforming defensive sectors by nearly 15%. This contrasts to the narrative that eventually year was a risk-off rally as large caps beat small caps again by a healthy margin as investors favored extraordinary quality companies in the face of economic uncertainty. Investors went up in quality overseas as well with emerging sells (EM) underperforming their developed markets (DM) counterparts by 4.80% in 2019.
We did witness a reversal of some trends recently into year-end with foreign equities outperforming their U.S. peers by 1.46% and EM rallying 7.32% to beat DM by close to 4% in December. Some are profession for this reversal to continue into 2020, but we have less confidence that some of these will persist meaningfully as the tendencies of 2019 roll into 2020. With that being said, however, we are keeping an eye on emerging markets disinterests, specifically, as they look interesting from both a positioning and relative valuation perspective.
FIGURE 2: CYCLICALS Proportionate TO DEFENSIVES SAW THE GREATEST PERFORMANCE SPREAD
Source: Bloomberg Finance, L.P., as of December 31, 2019. The data is representative of the 1-month and 12-month recurs of the indexes found in the Definitions list below. Past performance is not indicative of future returns. One cannot invest when in an index.
Investors Stayed Home in 2019
Like performance, ETF flows heavily favored the U.S. relative to other regions, and U.S. substantial caps were in favor relative to small caps for nearly the entire year. Investors also favored blossomed market ETFs compared to emerging markets products, and cyclical sectors compared to defensive sectors, but the magnitude of issue leadership were really in the U.S. relative to international and U.S. Large Cap relative to Small Caps spaces. Thanks to $6.39 billion of inflows likened to $1.34 billion in the fourth quarter, investors favored ETFs focused on value stocks even after they go oned to suffer relative to growth. Notably in December, defensive sector ETFs took $1.43 billion, while cyclical sector ETFs saw $3.18 billion of outflows.
Dig 3: U.S. Equities Dominated ETF Flows
Source: Bloomberg Finance, L.P., as of December 31, 2019. Data displays the difference in net originates of ETFs tracking the five pairs of equity segments relative to one another. Each equity segment is comprised of a company of ETFs that track indexes that are representative of those broad exposures, covering both the broad private and broad international equity market segments that are representative of the indexes found in the Definitions list below.
To Reflate, or to Go to seed? That is the Question.
It’s not quite Shakespeare, but a key question for investors in the early days of 2020 should be whether the calls for reflation due to modernizing economic fundamentals come to fruition, or whether we enter a period of stagflation that sees the current low of economic nurturing coinciding with rising prices. Investors should expect earnings and economic data to reflect, and match, the multiple development we saw in risk assets in 2019. Recent data, however, points to global growth not showing signs of bottoming fair yet.
While a portion of 2019’s headlines remain, and new ones have emerged in the first days of the year, investors should not recall about the supportive backdrop of loose monetary policy. In a continued late cycle economic environment, but with unusually supportive monetary policy, we favor cyclical sectors, but not across the board. We also advocate that investors may call for to begin thinking about some defensive positioning as volatility should increase.
Current Positioning
Figure 4 highlights the stylish positioning of our quantitatively-based Relative Weight Model. These views are recalibrated monthly based on composite measures of inertia and valuation.
FIGURE 4: Relative Weight Positioning
Source: Direxion, as of December 31, 2019.
Definitions
Russell 1000: The Russell 1000® Guide consists of the largest 1,000 companies in the Russell 3000 Index, which is made up of 3,000 of the largest U.S. companies.
Russell 2000: The Russell 2000® Indication is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 unqualified market capitalization.
Russell 1000 Growth: The Russell 1000® Growth Index measures the performance of those Russell 1000 actors with higher price-to-book ratios and higher forecasted growth values.
Russell 1000 Value: The Russell 1000® Value Forefinger measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted evolvement values.
MSCI USA Cyclical Sectors: The MSCI USA Cyclical Sectors Index is based on MSCI USA Index, its parent guide and captures large and mid-cap segments of the US market. The index is designed to reflect the performance of the opportunity set of global cyclical casts across various GICS® sectors. All constituent securities from Consumer Discretionary, Financials, Industrials, Information Technology and Facts are included in the Index.
MSCI USA Defensive Sectors: The MSCI USA Defensive Sectors Index is based on MSCI USA Index, its progenitrix index and captures large and mid-cap segments of the US market. The index is designed to reflect the performance of the opportunity set of global defensive public limited companies across various GICS® sectors. All constituent securities from Consumer Staples, Energy, Healthcare, Telecommunication Appointments and Utilities are included in the Index.
FTSE All-World ex US: The FTSE All-World Excluding United States Index is a free organize market capitalization weighted index. FTSE All-World Indices include constituents of the Large and Mid-capitalization universe for Evolved and Emerging Market segments.
MSCI EAFE IMI: The MSCI EAFE Investable Market Index (IMI), is an equity index which apprehensions large, mid and small cap representation across Developed Markets countries around the world, excluding the US and Canada.
MSCI Emerging Supermarkets IMI: The MSCI Emerging Markets Investable Market Index (IMI) captures large, mid and small cap representation across 24 Emerging Vends (EM) countries.
MSCI ACWI Index: The MSCI ACWI Index is designed to represent performance of the full opportunity set of large- and mid-cap horses across developed and emerging markets.
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