What happened in December?
Stocks continued to have positive returns. International stocks, measured by the MSCI World ex-US index, increased 3.19% in December. Large cap stocks, measured by the S&P 500 were up 3.02% for the month. Small stocks, measured by the Russell 2000 were up 2.88%. Bonds, measured by the Barclays US Aggregate Bond index, were down -0.07%.
What is your investment team paying the most attention to this month?
Interest rate levels have a sizable impact on financial markets, so we always pay attention to how they are changing. In our November commentary, we made the following observations:
- Longer-term interest rates looked likely to head higher
- If longer-term rates go up and short-term rates stay the same, the yield curve steepens
Both of these happened in December. The 10-year treasury yield ended the month of November at 1.767%, and by the end of the year, it was at 1.919%. When interest rates increase, bond prices decrease, which partially explains why the Barclays Aggregate Bond index decreased slightly for the month.
In addition, the 2-year treasury yield ended November at 1.61%, and ended December at 1.58%. So, the difference between the two yields increased from roughly 0.15% in November to 0.33%. Why does this matter to you? For a couple reasons:
- It affects the bonds we buy for your account – short term bonds perform better in this environment.
- Increasing interest rates and a steepening yield curve are positive for the economy and stock market. This decreases the likelihood of a large decrease in global stocks.
Stock markets across the world had positive returns in December, with international stocks slightly outperforming domestic stocks. We continue to pay close attention to the general direction of interest rates, which may be increasing, as well as the shape of the yield curve, which may be steepening. If these trends continue, they could both have positive impacts on 2020 market performance.
Happy New Year! We hope that 2020 is filled with happiness and positive financial returns.