Cyclicals and EM Lead / Bank Stocks Recover / Valuations Reach Highs

Fourth quarter U.S. returns were again led by cyclical or higher-beta sectors as investors rode the momentum of some positive news through the quarter. Technology stocks continued to provide leadership during the quarter and Health Care offset a previously lackluster performance during 2019 with a nice year-end rally. Energy stocks, out of favor since the first quarter, rebounded along with commodity prices. Also, a steepening of the yield curve potentially relieved some pressure from bank net interest margins and allowed financials to also rally into the end of the year.

Sectors not as favorable for the quarter were Real Estate, Utilities, and Consumer Staples. These defensive sectors were not in demand as a result of the better economic outlook.

Internationally, a downtrend in the U.S. dollar and the uptick in risk-on activity had investors turning their attention back toward emerging market equities. Recoveries in some economies helped cause investors to seek additional exposure. The most important fundamental variables were likely the improvement in U.S./China trade relations and another round of monetary policy easing by the Peoples Bank of China.

Meanwhile, U.S. and global equity valuations moved back toward 10-year highs. While the momentum we have seen has caused some to overlook this increase in valuations, it’s possible the rally through Q4 and into January could be partially checked when and if investors shift their focus on valuation multiples.

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