Before 2019 finally fades away in the read-view mirror, let’s take one last look back because it truly was a remarkable year.
A year ago, hardly anyone was bullish about what the new year would bring. Some economists were deeply pessimistic, warning that trade wars, rising interest rates, weakening business investment, and slowdowns in Europe and China would sink the global economy.
A few were cautiously optimistic, citing falling unemployment rates in the U.S. and business-friendly government policies as potential catalysts for continued growth.
No one that I’m aware of predicted the surge in investor confidence that carried all the major North America indexes to record highs. Certainly not me.
So, where did that upward momentum come from? Here are my choices for the big surprise winners of 2019.
Technology stocks. Back in 1999-2000, dot.com mania fuelled a huge market rally that turned out to be a bubble. When it burst, it took the whole market down with it. This time appears to be different. The S&P 500 Information Technology Index ended the year up 48 per cent, driven by big gains in well-established, profitable companies. Apple was up 86 per cent last year, Facebook added 57 per cent, while Microsoft gained 55 per cent. We’re unlikely to see increases of that magnitude this year but I don’t expect a collapse either. This just doesn’t look like a repeat of 2000 to me. Despite their big gains last year, both Apple and Microsoft have p/e ratios under 30 while Facebook is just a little above that level. Yes, that’s higher than the S&P overall, but not out of line for high-growth companies.
Incidentally, if you’re wondering why the New York indexes performed so much better than the TSX, look no farther than the tech sector. Once you get beyond Shopify and BlackBerry, we don’t really have one. IT stocks account for only 5.7 per cent of the total in Canada. They make up more than 21 per cent of the S&P 500, and that index’s top four companies by market cap are all technology firms.
Utilities. Utility stocks are normally predictable but dull. In most years they are market laggards. But 2019 was anything but normal and the S&P/TSX Capped Utilities Index ended with a gain of 31.6 per cent, well ahead of the overall gain of 19.1 per cent for the Composite.
The reason? The big reversal in interest rate trends. Utility stocks sank at the end of 2018 on the expectation the U.S. Federal Reserve Board would continue to hike its target rate and that Canada might be forced to follow suit to protect the loonie. Instead, the Fed did an about-face and ended up cutting three times over the last six months of the year, while the Bank of Canada held the line.
Utilities are interest-sensitive. The surprise turnaround helped to propel the shares sharply higher. Brookfield Infrastructure Partnership gained 37.6 per cent, Emera was up 36.7 per cent for the year, and Algonquin Power & Utilities was ahead 33.8 per cent.
More of the same this year? Not likely. The Fed has signalled a pause in rate cutting and the Bank of Canada is going nowhere. Expect utilities stocks to return to their usual dull routine in 2020. In fact, we may see some slippage from current prices.
Gold. Although gold stocks represent only a small proportion of the Composite Index, they made an outsize contribution, rising almost 40 per cent. Since the price of the metal itself increased by only 18.5 per cent, it shows how depressed the mining companies were at the start of 2019.
Big gainers during the year included Kirkland Lake Gold (+61 per cent), Agnico Eagle (+45 per cent), Franco-Nevada (+40 per cent), and Barrick Gold (+37 per cent).
Could we see a repeat this year? Possibly. Gold is a safe haven investment. If President Trump escalates his trade wars (Europe appears to be his new number one target) or if the tensions with North Korea, Iran, or China escalate, gold could shoot past $1,600 (U.S.) over the next 12 months, boosting the mining stocks with it.
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Finally, I should mention one other surprise development in 2019 — the powerhouse performance of bonds. Fixed-income securities were supposed to be a disaster zone as rates moved higher. But, of course, they retreated instead, driving bond yields lower and prices higher. The FTSE Canada Universe Bond Index ended the year with a gain of 6.9 per cent. The Long-Term Bond Index did even better, at 12.7 per cent.
As I said, it was a remarkable year. Now we’ll see what surprises 2020 has to offer.