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Big Picture

A Quarterly Market Review in 6 Charts: Q4 2019

Morningstar’s fourth-quarter 2019 analysis covered the yield curve, trends in U.S. investments abroad, and more

Cooling worries about potential trade war damage and geopolitical concerns, as well as multiple rounds of Federal Reserve interest-rate cuts in 2019, resulted in a bull market for both U.S. stocks and bonds in fourth-quarter 2019.

As the year and decade conclude, we’re reflecting on economic and market trends, such as the year’s IPOs and newly launched funds. Domestically, there have been overall wage gains and a shift in CEO and small-business-owner sentiment. On a global scale, there’s been a reversal in U.S. and foreign direct investment.

Every quarter, Morningstar’s quantitative research team reviews the most recent U.S. market trends and evaluates the performance of individual asset classes. Then, we share our findings in the Morningstar Markets Observer, a publication that draws on quantitative analysts’ careful research and market insights.

Here are some of the findings from our latest quarterly market review.

Yield curve steepened in fourth-quarter 2019

The Federal Reserve cut interest rates by another quarter point in October, marking the third decrease of 2019. Bond returns were very strong last year because bond prices are inversely related to yields.

This year’s inverted yield curve, shown on the chart below, had fueled fears that a slowing U.S. economy would tip into recession. However, the Fed’s easy money, paired with cooling anxiety about potential trade war damage, has been met with relief in U.S. markets. The result was a steepening of the yield curve between the end of 2018 and the end of 2019.

Source: U.S. Federal Reserve. ©2020 Morningstar. All Rights Reserved.

Small-business owner and CEO sentiment diverged

Small-business-owner confidence remained elevated throughout 2019, while CEO confidence plunged over the course of the year. These trends, as measured by the Conference Board CEO Confidence Index and the NFIB Small Business Optimism Index, are shown on the chart below.

Source: The Conference Board, U.S. Department of Labor, U.S. Bureau of Labor Statistics, National Federation of Independent Business (NFIB). ©2020 Morningstar. All Rights Reserved.

This type of divergence between the two segments of the business community is not unusual. Historically, CEOs appear to anticipate turning points in the business cycle well ahead of small businesses. However, full-blown recessions only emerge when both segments’ confidence drops significantly, which is not the case here.

Prices for major life events outpaced wages

Overall prices, denoted by the consumer price index, or CPI, have declined relative to household income, indicating aggregate wage growth. However, when we isolate life events that require significant planning and savings, particularly education and healthcare, we see that there has been a dramatic price increase over the past 20 years. Fortunately, tuition trends recently have shown signs of abating.

The chart below shows cost trends among select CPI subindexes, divided by a measure of private-sector wages paid in the United States.

Source: U.S. Bureau of Economic Analysis. ©2020 Morningstar. All Rights Reserved.

Technology IPOs gained strength

More than 1,600 companies went public over the past decade. On a market-cap-weighted basis, the number of IPOs from technology companies surpassed other sectors in the past two years, capturing the lion’s share of IPO market value (31% in 2018 and 38% in 2019)—an increase from an average of 11% over preceding years. Conversely, consumer cyclical dwindled from almost 47% of new market share in 2010 to only 13% this year. These trends in market cap by sector are shown on the chart below.

Morningstar equity data. ©2020 Morningstar. All Rights Reserved.

Equity and passive funds led 2019 launches

Of the 462 new U.S. domiciled open-end and exchange-traded funds launched in 2019, the majority were equity funds. Newly launched U.S. equity funds attracted $34.3 billion in net inflows, the largest of all categories. This was somewhat surprising, considering U.S. equity funds have experienced significant outflows overall.

The breakdown between open-end and exchange-traded funds was relatively equal, whereas the majority of new funds launched were passively managed. This distribution is shown on the chart below.

Source: Morningstar Direct℠ ©2020 Morningstar. All Rights Reserved.

United States continued to attract foreign investors, despite U.S. companies pulling back

Domestic companies typically spend more money abroad, either in the interest of expanding operations or investing in international companies, with a few exceptions. This is measured through “direct investment” in the balance of payments.

However, the chart below shows that the trend of net outward U.S. direct investment has reversed since 2015 due to a pickup in U.S. investments by foreign entities, and more recently exacerbated by a pullback in U.S. investments abroad.

Source: Bureau of Economic Analysis (BEA). ©2020 Morningstar. All Rights Reserved.

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