On New Year’s Eve investors should be cracking open the very best champagne because 2019 has been a really fantastic year.
It doesn’t really matter where you look, assets have been rising – although admittedly from a fairly low base after a bleak year in 2018.
Local shares are up a solid 20% plus dividends and potentially much higher for those with a more speculative portfolio with a sprinkling of shop now, pay later lenders, medical marijuana stocks and some impressive technology minnows.
Technology shares shot the lights out
Looking overseas, shares have done even better, adding an amazing $14.4 trillion for the year.
The US has had a ripper of a year with technology stocks racing ahead with stocks such as video streaming company Roku multiplying investor funds by more than 4.4 times.
Apple rose more than 77%, Facebook and Microsoft were up more than 50% and the giant laggards in the sector – Google, Netflix and Amazon – still averaged a gain well above 20%.
At a time when interest rates are tiny, those sorts of record-breaking returns are no small feat and should fill lucky investors with an immense sense of satisfaction – together with a dose of caution about 2020.
Falling interest rates drove markets higher
The dramatic falls in global interest rates that helped to drive share markets higher came after a series of central banks suddenly flipped the switch back to stimulus and China showed it was serious about stimulating its massive economy.
The US and Australia weren’t alone in enjoying a fantastic year – in US currency terms the MSCI’s world index that represents almost 50 countries was up 24% and many of the world share markets were up more than 20%.
China’s tech sector also boomed with a 64% rally and countries that were basket cases not so long ago also saw some incredible recoveries, with the Greece share market and particularly its once troubled banking sector soaring.
Even Russia’s share market had an amazing year, producing a 40% return.
Bond markets keep up their incredible run
It wasn’t only share markets that have been booming – the fall in interest rates has caused such a positive year for shares also reignited the long running explosion in bond markets.
While most investors would have been nervous after that record run, particularly as interest rates on some of the “safest” bonds threatened to plunge negative, 2019 was another great year.
US Treasury bonds, the world’s biggest market government debt market, made a very impressive 9.4% after yields plunged by up to 1.2%.
That was a big turnaround from the five quarters in which bond yields rose – sending the capital value of bonds down – before yields fell sharply in the last quarter of 2018.
Even in Germany where bond yields went negative due to the safe status of Bunds, their capital value rose by about 5.5%, which is a great return on such a safe investment.
During that time the yield on German bonds fell to an incredible low of -0.74% – in other words, if you bought that bond and held it for 10 years you would have fewer Euros than you began with.
Even with the Brexit crisis and an election, UK bonds – known as gilts – returned 4.5%.
It was an even rosier scene for some of the less secure bonds with Ukraine’s dollar bonds and Greece’s euro bonds both adding more than 30% to their capital value.
After the party there could be a hangover
If there is a bad side to all of this great news, it is that after such a knockout year, most investors will start getting nervous about what lies ahead in 2020.
That is not just a matter of suspicion either, the facts back up the chances that a year of larger than normal returns can be followed by a year in which lower returns are the order of the day.
Using US figures, which are close enough to Australia’s due to the fact the US market usually sets the global tone, 2020 could be a lot more disappointing than 2019.
Research from the Bespoke Investment Group shows that in any year in which the S&P 500 index rallies by more than 20%, the following year returns an average of 6.6% – down on the overall average of 7.6%.
While those averages might be accurate since 1928, percentages can only express an average so the range of possibilities.
So, it is not impossible for stocks to repeat their runaway returns of 2019 in the coming year, but it is also not impossible for returns to have a minus sign in front of them.
That is part and parcel of what investing in the share market is all about – along with the risks of out-sized returns such as those enjoyed in 2019 comes the risks of negative returns such as the 7.1% fall experienced in 2018.