Strong Performers Can Bring Momentum
U.S. investors had something to celebrate with the new year. Well known indexes like the S&P 500 and the Dow Jones Industrial Average posted a strong end to 2019, with total returns of 33.07% and 25.3%, respectively.
Those were not the only indexes to notch big gains for the year.
Bonds, too, did well in 2019.
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In fact, there were numerous strong performers, giving diversified investors something to be happy about. Here are some standouts for the year, representing both equity and fixed income.
A solid performer among domestic asset classes was the U.S. mid-cap growth category. The S&P 400 index of mid-cap stocks returned 26.18% for the year. Stocks categorized as mid-caps are typically those with a market capitalization between $1 billion and $5 billion. However, as markets continue to rally, market capitalizations grow, and stocks graduate from mid-cap to large-cap status.
Three of the S&P 400's best performers did, in fact, join the S&P 500 large-cap index on Dec. 23, 2019.
Live Nation Entertainment (ticker: LYV), Steris ( STE) and Zebra Technologies Corp. ( ZBRA) all sport market caps north of $12 billion. The three stocks replace another trio that slipped in market cap, and are moving to the mid-cap index. Those stocks are Affiliated Managers Group ( AMG), TripAdvisor ( TRIP) and Macerich Co. ( MAC).
Event promoter Live Nation climbed 45% last year, finishing at $71.47. The stock climbed steadily for the first seven months of the year, then spiked in December on news of a U.S. Justice Department settlement allowing Live Nation to merge with Ticketmaster.
Steris, which makes devices for the health care and pharmaceutical industries, advanced more than 42% in 2019.
The company's earnings accelerated at double-digit rates for the past two years. Analysts expect that trend to continue, albeit at a slower pace. Wall Street is eyeing Steris profit growth of 14% this year and 10% next year.
Zebra Technologies, which makes bar code products and systems to help retailers track purchases, gained 60% last year.
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One driver of price growth is increased institutional ownership; as banks, mutual funds, insurance companies and hedge funds gain confidence in a stock, they will snap up shares, sending the price higher. Zebra's institutional ownership has increased in each of the past three years.
On the fixed-income side, U.S. long corporate bonds were a highlight. The Vanguard Long-Term Corporate Bond exchange traded fund ( VCLT) tracks investment-grade domestic bonds with average maturities of 10 to 25 years.
Longer term bonds return more than those with shorter maturities, but also carry more risk. That's partly because it's easier to guess where interest rates will be in the shorter term, so bond investors demand a higher return to lend money for a longer time period with more interest-rate uncertainty.
Last year's bond rally defied expectations at the end of 2018, when forecasters believed the Federal Reserve would raise interest rates four times. Instead, the central bank ended up slashing rates, giving bond prices a boost in the process.
The Vanguard Long-Term Corporate Bond ETF returned 23.89% in 2019 -- a return on par with stocks. The fund is pegged to the Bloomberg Barclays U.S. 10+ Year Corporate Index. Although it consists of investment-grade bonds, there is exposure to the lower end of that spectrum, with the vast majority of holdings rated A and BBB.
That somewhat lower credit quality adds to the potential for return, as investors also demand a higher interest rate for taking on added credit risk.
While past generations often viewed bonds as "safe," today's investors can't afford that luxury. Bonds can provide ballast in a diversified portfolio, serving to mitigate stocks' volatility.
However, that's mostly true for short-term bonds with high credit quality. Lengthening the term or lowering the credit quality introduces risk, which can be more appropriate for the equity side of a portfolio.
Going into 2020, investors should not necessarily expect either bond or stock market rallies to continue. That's not a forecast for a slowdown; it's just fair warning that price and interest-rate movements are unpredictable -- both to the up- and downsides.
[See: 12 Reasons Investing is Easier Than You Think.]
Broad diversification is a proven way to smooth returns in weaker markets, while allowing investors to capture gains during good times.
