Domestic Markets – 4Q19 Review
The surge in U.S. equities that has been in place throughout 2019 continued in the fourth quarter, with the S&P 500 Index ending the year just shy of an all-time high level.
The surge in U.S. equities (defined as the S&P 500 Index) that has been in place throughout 2019 continued in the fourth quarter, with the S&P 500 Index ending the year just shy of an all-time high. The S&P returned 9.1% in the fourth quarter, and 31.5% for the year. After trailing their larger-cap counterparts over the course of the year, the small-cap Russell 2000 Index posted a fourth-quarter gain of 9.9% and a calendar-year return of 25.5%. As an asset class, small-cap stocks still have some runway before eclipsing their August 2018 high watermark.
On a style basis, growth once again outperformed value in the quarter. This style trend has been in place for much of the past decade, undoubtedly aided by the low rate environment that has persisted over this timeframe. Low rates decrease the discount rate applied to future cash flows – thereby increasing their present value. As growth stocks often tend to have more of their cash flows in future years, the low discount rate has a more positive impact on the present value of growth stocks (vs. value).
Style-driven environments of this nature tend to self-cancel over time – this is evidenced when reviewing the value/growth relationship over past decades:
| 2010s | 2000s | 1990s | 1980s | |
| Russell 1000 Value | 205.1% | 27.7% | 325.0% | 422.2% |
| Russell 1000 Growth | 312.3% | -33.4% | 535.7% | 318.1% |
| 2010s | 2000s | 1990s | 1980s | |
| Russell 2000 Value | 173.0% | 121.4% | 223.3% | 399.3% |
| Russell 2000 Growth | 239.7% | -12.9% | 255.1% | 197.0% |
As the above tables illustrate, the style debate should not be an either/or discussion – clients should have exposure to both value and growth managers.
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