2019 was a remarkable year for the financial markets; here I break down results for the major asset classes:

Equity Markets

The S&P 500 Index rose 9.1% in the fourth quarter, bringing its year-to-date result to a whopping 31.5%, the best calendar year return since 2013 and capping a decade of strong performance. Small cap stocks outperformed large caps in the fourth quarter, but trailed for the year (Russell 2000: +9.9%; +25.5% vs. Russell 1000: 9.0%; +31.4%). Growth stocks outperformed for both periods (Russell 1000 Growth: +10.6%; +36.3%; Russell 1000 Value: +7.4%; +26.5%).

Real Estate (-0.5%) was the only sector to post a negative return in the fourth quarter, though Utilities (+0.8%) was only modestly positive. Technology and Health Care (both +14.4%) were the twin “winners.” For the year, all sectors posted double-digit returns—Energy (+11.8%) and Technology (+50.3%) were the bookends. The Tech sector is up a cumulative 840% since the market low on March 9, 2009.

Notably, the stock market rally in 2019 was fueled largely by expansions in share price multiples in contrast to the rest of the decade, when returns were driven mostly by earnings growth. As a result, some term the market “overvalued” by a number of metrics relative to long-term averages.

Developed ex-U.S. markets trailed the U.S. but were still up sharply in the fourth quarter and 2019 (MSCI ACWI ex-USA: +8.9%; +21.5%). Virtually all countries posted positive returns for both periods, though results were varied. Emerging markets outperformed developed markets in the fourth quarter but trailed for the full year (MSCI EM Index: +11.8%; +18.4%). Chile (-8.8%; -16.9%) was the only country to deliver a negative return for both periods due to a sharp decline in the Chilean peso amid civil unrest. Russia (+16.8%; +50.9%) was the top performer for the year as its central bank aggressively cut rates. Returns for the BRIC countries were mixed. Brazil (+14.2%; +26.3%) and China (+14.7%; +23.5%) also posted strong results while returns from India (+5.3%; +7.6%) were more modest.

Fixed Income Markets

Fixed income markets posted strong returns in 2019 fueled both by falling interest rates and strong investor demand, especially for higher-yielding sectors. The 10-year U.S. Treasury closed the year at 1.92%, up from 1.68% at the end of the third quarter and down sharply from 2.69% at the close of 2018.

The Bloomberg Barclays US Aggregate Bond Index rose 8.7%, the best calendar year return since 2002, with the lowest-quality tier of the Index up 16.4%. Fourth quarter gains were more muted at 0.2% as Treasury yields rose modestly.

Corporate bonds were the best-performing sector in the fourth quarter and 2019 (Bloomberg Barclays Corporate Index: +1.2%; +14.5%) with long corporates gaining nearly 24% in 2019. High yield corporates also posted sharp gains; the Bloomberg Barclays Corporate High Yield Index rose 2.6% in the fourth quarter and 14.3% in 2019. Leveraged loans suffered outflows throughout the year, but still posted a solid return (CS Leveraged Loan: +1.7%; +9.0%).

The Bloomberg Barclays US TIPS Index sharply outperformed the Treasury Index in the fourth quarter as inflation expectations rose, more than offsetting underperformance earlier in the year. The 10-year breakeven spread ended the year at 1.77%, up from 1.53% as of Sept. 30, 2019, and 1.71% as of Dec. 31, 2018. Worries over an inverted yield curve were a distant memory—the spread between the 2-year and 10-year Treasury was 34 bps at year-end. Municipal bonds (Bloomberg Barclays Municipal Bond: +0.7% and +7.5%) outperformed U.S. Treasuries in the fourth quarter and 2019 as the sector attracted record inflows.

Overseas, rates followed a similar path with most higher in the fourth quarter but lower for the year. The amount of negative-yielding debt declined from a high of $17 trillion in August 2019 to less than $12 trillion as of year-end. The U.S. dollar gave up some gains in the fourth quarter, especially versus the euro (-3%), the Australian dollar (-4%), and the British pound (-8%). It posted a modest gain versus the Japanese yen (+0.6%).

The Global Aggregate ex-US Index rose 0.7% in the fourth quarter on an unhedged basis but fell 1.1% on a hedged basis. For the full year, the hedged version outperformed unhedged (7.6% vs. 5.1%).

Emerging market debt benefited from both rate cuts and a risk-on environment. Local currency emerging market debt, as measured by the JPM GBI-EM Global Diversified Index, gained 5.2% in the fourth quarter and 13.5% for the year. Russia (+10.0%; +34.0%) was a top performer on the back of rate cuts and a stronger ruble. The U.S. dollar-denominated JPM EMBI Global Diversified Index was up 1.8% in the fourth quarter and 15.0% for the year with mixed results across its 60+ constituents.

Real Assets

Real assets returns were mostly strong in the fourth quarter. The Bloomberg Commodity Index gained 4.4% and the S&P GSCI Commodity Index was up 8.3%; the deviation between the two indices was largely attributable to the price of oil (up 9% and a much larger allocation within the S&P GSCI Index). MLPs, however, declined (Alerian MLP Index: -4.1%). Spot gold prices were up 3.4%. The DJ-Brookfield Infrastructure Index rose 4.0%. REITs (FTSE Nareit Equity Index) posted a modest loss (-0.8%). TIPS also fared well as real rates fell; the Bloomberg Barclays TIPS Index rose 0.8%.

For the full year, all returns were positive with Infrastructure (+28.7%) and REITs (+26.0%) leading the pack. MLPs (+6.6%) posted the lowest full-year return of the real assets category.