Global share market bonanza
The US share market closed the 2019 calendar year having posted their best annual performance since 2013. The gains have mainly been driven by the big technology companies such as Apple and Microsoft that have led the decade-long bull market run. The year finished very differently to how it started, as the Australian share market and global share markets fell heavily during the December 2018 quarter on worries about slowing economic growth, and the odds that we were approaching the end of a decade long bull market.
An improving economic outlook, progress between the US and China on trade negotiations towards the end of the year, and three interest-rate cuts by the Federal Reserve have boosted US investors’ confidence that the economic expansion can continue. The Federal Reserve shifted their monetary policy during July in cutting the US cash rate for the first time in a decade and then lowering interest rates again in September and October, which saw the share market surge over the last six months of the year.
Over the last 12 months, the US benchmark S&P 500 surged 28 per cent, while the Nasdaq Composite of mainly technology shares rose by 35 per cent. These were their most significant gains since 2013 when they increased by 30 per cent and 38 per cent, respectively.
The technology sector has been the best performing of the S&P 500 index’s 11 sectors, rising by 47 per cent during the year. The sector is responsible for 31 per cent of the S&P 500 index’s total return for 2019. Microsoft and Apple’s share prices increased by 55 per cent and 85 per cent respectively in 2019, and given that they each have a market capitalisation of more than $US1 trillion each, their gains have had a sizable impact in producing nearly 15 per cent of the S&P 500 index’s total return.
With the daily tit-for-tat tariffs at their peak in late March, the yield on the 10-year Treasury note fell below the yield on the three-month Treasury bill. Such an inversion has proceeded every recession in the US since 1975 and resulted in financial markets continuing to be volatile, while the daily tit-for-tat tariffs between the US and China weighed heavily on global manufacturing and slowed economic growth. With the Fed cutting interest rates, the yield on the 10-year Treasury note rose above the three-month Treasury bill during October and confidence was then restored. The market’s anxiety was further eased towards the end of the year as representatives from both countries indicated that an initial agreement is near.
The 2019 resurgence in share markets wasn’t limited to US companies. The Stoxx Europe 600 gained 23 per cent during the year, while China’s Shanghai Composite is up 22.3 per cent, and both Japan’s Nikkei 225 and the Australian S&P/ASX 200 Index rose by 18 per cent over the 12 months. This was the local share markets best annual gain in a decade.
Despite the surge in global share markets, the traditional ‘protection’ assets of gold also soared by 18 per cent during 2019. This rise was the gold sector’s best performance in a decade.
The return from the Australian share market was quite remarkable as during the year earnings estimates retreated after the lowest economic growth since the global financial crisis. China’s currency devaluating campaign, the ever-increasing hostile US trade policy and Australia’s housing downturn and debilitating drought, were a crippling combination for the Australian economy.
However, the benchmark S&P/ASX 200 index rose 1037.7 points over the 12 months to close the year at 6684.1 points. This surprising gain was spurred on by surging global markets, three interest rate cuts from the Reserve Bank, and their guidance for possible further cuts and quantitative easing as it pursues their mandate of higher inflation and full employment.
The combination of the rising share prices and falling profit estimates saw the forward price-to-earnings valuation of the S&P/ASX 200 hit a record high near 17.5 times. With this rising valuation, the 12-month forward dividend yield of the share market hit a 10-year low of 4.1 per cent. A 19.4 per cent rise in the broader All Ordinaries index meant that, since records began in 1936, it was the 16th best year for the Australian share market.
Healthcare (+41.2 per cent), and information technology (+31.8 per cent), were the best performing sectors. In contrast, financials (+7.3 per cent) was one of the worst sectors as they were hit by the Royal Commission into banking, causing slower loan growth and tightening margins on interest rates.
Government bonds also surged, and Australian residential property started to recover from a fall of roughly 10 per cent as the RBA cut the cash rate to a record low 0.75 per cent in response to below target economic growth, and rising unemployment.
The 2019 year will be remembered as one where central banks abandoned plans for interest rate rises, balance sheet normalisation in favour of interest rate cuts, and balance sheet expansion.
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