Fourth quarter 2019 capital markets outlook

January 2020


  • December capped off a historically strong year for most risk-oriented markets. Global equity markets generally produced gains in the 2-4% range during the month, with full calendar year returns ending up approximately in the 18-32% range.
  • With the exception of long-term interest rates (which ticked up during the month), the yield curve remained relatively stable in December. On a trailing one-year basis, however, interest rates declined by a material margin as the Federal Reserve lowered rates three times in 2019. From a performance perspective, broad investment grade bonds produced one-year returns in the high single-digits whereas long US Treasury bonds generated a return of nearly 15% for the year.
  • Due in part to strong returns across nearly all asset classes in 2019, investors should anticipate that long-term, forward-looking returns will be lower as of early-2020 when compared to early-2019 capital market assumptions.
  • US equity markets remain expensive whereas non-US equity markets remain reasonably valued relative to their histories. US credit and emerging markets debt spreads remain reasonably valued relative to their histories, although the richness of US high yield has recently increased (i.e., is now more expensive).
  • Relative to their counterparts (growth and large cap), value and small cap equities continue to remain attractive from a valuation perspective.
  • Implied equity market volatility remained at relatively low levels throughout December, generally staying in the 12-16 range throughout the entire month (the historical average is ≈19).
  • The Market Sentiment Indicator stayed green at month end.