Markets & Economy

Monthly Market Review

December 2019
T. Rowe Price

Investors’ growing confidence in an upcoming “phase one” trade deal with China helped stocks record solid gains in December. The S&P 500 Index posted its best yearly gain since 2013—albeit one measured off a low base established by steep declines the previous December. The energy sector led the gains within the S&P 500, as oil prices climbed to the highest level since mid‑September. Technology stocks were also especially strong, driven by sharp gains in Apple and Microsoft, which ended the month together accounting for nearly 40% of the sector’s market capitalization. Industrials shares trailed and ended the month flat, weighed down by a drop in Boeing shares due to ongoing uncertainties about the reintroduction of the company’s troubled 737 MAX airliner. Boeing’s decline also played a major role in the Dow Jones Industrial Average trailing the other benchmarks. The aircraft maker and defense conglomerate maintained the largest weighting in the Dow at year‑end because of the average’s price‑based weighting system.

Trade Fears Dissipate as Deal Is Announced

The month began on a decidedly down note, with the S&P 500 suffering its worst two‑day loss since September. President Donald Trump’s decision Monday, December 2, to reinstate steel and aluminum tariffs on Brazil and Argentina seemed to receive part of the blame. Although not substantial in terms of U.S. dollar volume, the move signaled to some that the White House had returned to a more aggressive trade stance. Indeed, stocks fell sharply again on Tuesday after the president suggested that it might be better to wait until after the November 2020 elections to strike a trade deal with China. Meanwhile, Commerce Secretary Wilbur Ross reiterated that the administration was prepared to go through with raising tariffs on Chinese goods on December 15, absent progress in negotiations.

The trade picture soon brightened considerably, however. On December 13, Chinese officials announced that a preliminary trade agreement had been reached, and the White House then confirmed that the U.S. would lower the tariff rate on about USD 120 billion in Chinese goods to 7.5% from 15%, while canceling the upcoming tariffs on nearly USD 160 billion in largely consumer‑related imports from China. The major indexes continued to drift higher over the next few weeks as both sides made assurances that the deal would soon be made official and its details released. On December 31, President Trump announced in a tweet that the signing ceremony would take place at the White House on January 15 and that he would later travel to China for negotiations of a “phase two” deal. T. Rowe Price traders noted that congressional approval of the U.S.‑Mexico‑Canada (USMCA) trade agreement and the diminished threat of new auto tariffs also seemed to bolster sentiment.

U.S. Indexes
Total Returns

 

December

Year-to-Date

Dow Jones Industrial Average

1.87%

25.34%

S&P 500 Index

3.02 31.49

Nasdaq Composite Index

3.54

35.23

S&P MidCap 400 Index

2.81

26.20

Russell 2000 Index

2.88

25.52

Past performance is not a reliable indicator of future performance.
Note: Returns are for the periods ended December 31, 2019. The returns include dividends based on data supplied by third‑party provider RIMES and compiled by T. Rowe Price, except for the Nasdaq Composite Index, whose return is principal only.
Sources: Standard & Poor’s, LSE Group. See Additional Disclosures.

Recession Fears Fade as Unemployment Drops to Five‑Decade Low

While December’s economic data offered mixed signals, fading recession fears seemed to provide another boost to sentiment. The S&P 500 recorded its best daily gain of the month on December 6, after the Labor Department reported that employers added 266,000 jobs in November, well above expectations and the best showing since January. The unemployment rate also fell back to 3.5%, the five‑decade low it touched in September. Personal incomes jumped 0.5% in November, the most in three months, while personal spending rose a healthy 0.4%. Retail sales (excluding the volatile auto sector) rose only 0.1% in November, however, well below consensus expectations. Spending fell sharply at restaurants, bars, and clothing stores, suggesting that consumers may be growing more cautious about discretionary purchases. Meanwhile, the housing sector appeared to be regaining momentum, aided by the sharp decline in mortgage rates over the past year. The Commerce Department reported that permits for new construction surged to their highest level in more than 12 years.

Data on the manufacturing sector remained considerably more downbeat. The Institute for Supply Management’s gauge of manufacturing activity weakened unexpectedly in November and indicated that the sector had contracted for the fourth month in a row. Durable goods orders fell unexpectedly in November, and the decline of regional factory indexes into or near contraction territory added to signs of persistent weakness in the sector.

Investors May Prove More Discriminating in 2020

In what may be a positive development for both markets and the efficient allocation of capital, T. Rowe Price traders report that market correlations appear to have diminished late in 2019. Over the past decade, individual stocks have often moved up and down in tandem, due in part to the rapid growth of index funds and other passive strategies. For much of the past year, the trade war and a general focus on macroeconomic events rather than on company fundamentals have also been at work. In recent months, however, investors have proven more discriminatory by rewarding stocks that surpass earnings and revenue expectations while punishing those that miss—a turnabout that may benefit active investors in the coming year.

Additional Disclosures

Copyright 2020 FactSet. All Rights Reserved.

J.P. Morgan. Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2020, J.P. Morgan Chase & Co. All rights reserved.

London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2020. FTSE Russell is a trading name of certain of the LSE Group companies. “Russell®” is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

The S&P 500 Index and S&P MidCap 400 Index are products of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”) and have been licensed for use by T. Rowe Price. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); T. Rowe Price is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index and S&P MidCap 400 Index.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

Equities in developed non‑U.S. markets rose in December, with some equity indexes hitting record highs, as investors moved back into riskier assets amid improvements in U.S.‑China trade relations and expectations that the UK will be able to finalize a Brexit deal prior to its anticipated late‑January departure from the European Union (EU).

The MSCI EAFE Index, which measures the performance of stocks in Europe, Australasia, and the Far East, returned 3.27%. Within the index, all 11 sectors advanced, led by utilities and materials. Value stocks in the EAFE index rose 3.67%, outperforming growth shares, which gained 2.87%. Emerging equity markets generally outperformed stocks in developed markets, led by advances in Latin America. 

European Stocks Follow U.S. Stocks Higher

European equities rose in December, buoyed by enthusiasm in U.S. markets and by the increased likelihood that the UK will be able to pass a Brexit deal. The advances came despite worrisome economic data that showed the region’s manufacturing downturn had worsened. Factory activity in the eurozone contracted for the 11th month in a row, pressured by a worse‑than‑expected deterioration in German manufacturing, according to the closely watched IHS Markit manufacturing purchasing managers’ index. Survey data showed the services sector expanded, easing fears that the manufacturing recession was spreading to the broader economy. T. Rowe Price International Economist Tomasz Wieladek said that a decline should be expected, given the widespread protests in France, the largest since 1995, which have affected neighboring economies. Wieladek expects eurozone activity to bounce back early in 2020, following the end of the French strikes, which erupted in response to proposals for sweeping pension reform.

International Indexes
Total Returns

MSCI Indexes

December

Year-to-Date

EAFE (Europe, Australasia, Far East)

 3.27%

22.66%

All Country World ex-U.S.A.

 4.36

22.13

Europe

 3.92

24.59

Japan

 2.11

20.07

All Country Asia ex-Japan

 6.71

18.52

EM (Emerging Markets)

 7.53

18.88

Past performance is not a reliable indicator of future performance.
All data are in U.S. dollars and represent gross returns as of December 31, 2019.
This table is shown for illustrative purposes only and does not represent the performance of any specific security.
Source: MSCI. See Additional Disclosures.

UK Equities Rally as Brexit Deal Seems Likely

Receding concerns about U.S.‑China trade relations, British politics, and Brexit drove UK markets sharply higher—more than 5% in U.S. dollar terms—in December. Prime Minister Boris Johnson’s Conservative Party won a clear majority in Parliament; subsequently, the House of Commons voted in favor of the Withdrawal Agreement, which lays out how the UK will end its membership in the EU. The agreement, which Johnson negotiated with the EU in October, now needs to be passed by the House of Lords and ratified by the UK and European parliaments if the UK is to leave the EU as scheduled on January 31.

Political Uncertainty Hits UK Economic Activity

The UK economy continued to struggle, as concerns about global trade and Brexit uncertainty curbed business investment and hit new orders from domestic and export markets. Economists forecast that UK growth is on track to be the worst in a decade. IHS Markit/CIPS data showed UK manufacturing contracted the most in more than seven years. It was also the eighth month in a row that manufacturing deteriorated as political uncertainty curbed orders.

Italy Passes 2020 Budget, Ending EU Showdown

After months of defiance of European Commission budget mandates, Italy’s parliament passed its 2020 budget. The budget targets the fiscal deficit to remain at 2.2% of gross domestic product (GDP) in 2020 for the third year in a row. Italy’s governing coalition said that the main goal of the budget was to cancel a sales tax hike amid concerns about weak household spending. Although the budget fell short of EU deficit reduction guidelines, Brussels did not ask for any revisions when the draft budget was presented in October.

Japanese Equities Rise but Underperform Other Developed Markets

Japanese stocks rose slightly but underperformed many of their developed market peers, as the Japanese economy continued to suffer from declining global demand. While the economy grew faster than expected in the third quarter, there are concerns that the consumption tax increase that took effect in October may hurt fourth‑quarter growth. In an effort to offset the negative impact of this tax, as well as the impact the weak global economy and some recent natural disasters have had on Japan, Prime Minister Shinzō Abe unveiled a USD 120 billion stimulus package.

Exports, Factory Activity Decline

Another factor that may hurt fourth‑quarter economic growth is that exports, which have declined for 12 consecutive months, fell 7.9% year over year in November. Factory activity also continued to contract in December. While the broader economy has been shielded from the deterioration in the manufacturing sector, a drop in car and department store sales suggests that the malaise has spread. The Bank of Japan’s quarterly Tankan poll of major manufacturers, which measures business sentiment, fell to a seven‑year low. The nonmanufacturing index reading also fell modestly. Most economists believe that Japan’s GDP will be negative in the fourth quarter of 2019, but the economy will return to growth in 2020.

Emerging Markets Outpace Developed Markets

Stocks in developing markets outpaced those in developed markets, as investors returned to riskier assets in line with an easing of trade tensions between the U.S. and China. The MSCI Emerging Markets Index returned 7.53%, led by gains in Latin America, where stocks in Argentina, Colombia, and Brazil rose 13.21%, 12.58%, and 12.46%, respectively, as measured by MSCI indexes. Russian markets also advanced, rising 8.41%, and closing the year up 52.72%. Russia fared better than most emerging markets as the threat of U.S. sanctions receded, the economy improved, interest rates declined, and investors were drawn to attractive levels of dividends paid by state‑run companies.

Outlook: Global Growth Slowly Improving

Significant moves by global central banks to loosen monetary policy have eased financial conditions, which is supportive of global economic activity. Indeed, the most recent global manufacturing purchasing managers’ surveys suggest that activity may have turned up recently, such as in Europe, where we have seen early signs of green shoots. While slowing Chinese demand and geopolitical tensions, including protests in Hong Kong and U.S. impeachment proceedings, continue to weigh on global activity, the fading risk of a no‑deal Brexit and manageable trade tensions will likely support a rebound in global growth. 

Additional Disclosures

MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

Longer‑term Treasury yields increased in December for the fourth straight month amid positive developments in the U.S.‑China trade dispute and some healthy economic news. After starting December at 1.78%, the yield of the benchmark 10‑year Treasury note rose to 1.92% by month‑end. (Bond prices and yields move in opposite directions.)

Longer‑Term Treasury Yields Rise Amid Progress on Trade Deal

Treasury yields have closely followed trade developments in recent months, and December was no different. Demand for safe‑haven government bonds increased, and yields fell, at the start of the month after President Donald Trump said that a trade deal might be delayed until after the 2020 election.

However, apparent progress toward a trade agreement, combined with the strongest jobs report in 10 months, spurred a pivot away from Treasuries. The news that the U.S. would lower the tariff rate on about USD 120 billion in Chinese goods and cancel upcoming scheduled tariffs helped send yields higher mid‑month. President Trump’s announcement on December 31 that the U.S. and China would sign a phase one trade deal on January 15 and begin talks on a phase two agreement spurred additional selling of Treasuries.

Although longer‑term Treasury yields have rebounded from historic lows in late August and early September, at the end of December they remained well below their levels at the end of 2018. The 10‑year note’s yield started 2019 at 2.69% but fell below 1.50% in the third quarter amid an escalation in the trade war and signs of an economic slowdown, especially in manufacturing.

The Treasury yield curve continued to steepen in December as short‑term yields, which are closely tied to monetary policy expectations, ticked down while yields of longer maturities increased. A couple of closely watched segments of the curve inverted earlier in 2019, but the yield curve has regained a more normal upward slope as growth forecasts have improved. 

Total Returns

Index

December

Year-to-Date

 

Bloomberg Barclays U.S. Aggregate Bond Index

‑0.07%

 8.72%

 

J.P. Morgan Global High Yield Index

 2.09

14.59

 

Bloomberg Barclays Municipal Bond Index

 0.31

  7.54

 

Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index

 1.09

  5.09

 

J.P. Morgan Emerging Markets Bond Index Global Diversified

 2.01

15.04

 

Bloomberg Barclays U.S. Mortgage Backed Securities Index

 0.28

  6.35

 

Past performance is not a reliable indicator of future performance.
Figures as of December 31, 2019. This table is shown for illustrative purposes only and does not represent the performance of any specific security.
Sources: RIMES, as of December 31, 2019; Bloomberg Index Services Limited, J.P. Morgan. See Additional Disclosures. 

Fed Signals No Additional Cuts in 2020

After helping to ease recession fears with three rate cuts in the July‑October period, the Federal Reserve, as expected, kept rates steady at its December monetary policy meeting. Fed Chair Jerome Powell said he believes “monetary policy is well positioned” to support economic growth, and in their economic projections, most policymakers forecast no additional rate moves in 2020.

U.S. Treasury Yields

Maturity

November 30

December 31

3-Month

1.59%

1.55%

6-Month

1.63

1.60

2-Year

1.61

1.58

5-Year

1.62

1.69

10-Year

1.78

1.92

30-Year 2.21 2.39

Source: Federal Reserve Board.

Solid Demand Boosts Investment‑Grade Corporates

Treasuries recorded negative returns in December as a result of rising rates, while riskier segments of the fixed income market generally performed well. Investment‑grade corporate bonds were the strongest segment in the Bloomberg Barclays U.S. Aggregate Bond Index. Investment‑grade corporates benefited from the risk‑on environment as well as a healthy technical backdrop that included a limited new-issue calendar, continued inflows to the asset class, and strong demand from Asia. Mortgage‑backed securities delivered solid results and outperformed Treasuries as increasing yields reduced the risk of higher levels of mortgage prepayments, which can reduce returns for investors.

Treasury inflation protected securities (TIPS) also outperformed nominal Treasuries as market‑based inflation expectations rose to their highest levels since July amid receding recession fears. In the latest inflation readings, higher gas prices contributed to a 0.3% increase in the consumer price index (CPI) in November, and for the 12‑month period, headline CPI, at 2.1%, was at its highest level since April. The core producer consumption expenditures (PCE) price index, the Fed’s preferred inflation measure, slipped to 1.6% in November from 1.7% in October and remained below the central bank’s 2.0% inflation target.

Munis Outpace Treasuries in Record Year for Inflows

Municipal bonds continued to benefit from solid demand—inflows for 2019 surpassed USD 85.7 billion, setting a new record. Although higher levels of taxable debt issuance by municipalities contributed to an overall increase in municipal issuance for the year, tax‑exempt issuance was below average, lending support to investors in tax‑exempt munis. Below investment‑grade munis, such as tobacco revenue bonds and Puerto Rico debt, outperformed for the month and year, and lower‑quality segments of the investment‑grade market, such as debt from Illinois and New Jersey, also performed well.

Lower‑Quality Bonds Drive High Yield Rally

High yield bonds recorded strong results and outperformed most fixed income segments, with the lowest‑quality high yield bonds leading the rally. After underperforming for much of the year, credit spreads—the excess yields that investors receive for holding riskier securities—for CCC rated bonds reached 12 percentage points on December 3, the highest level since 2016. However, by the end of the month, CCC spreads compressed to 10.77 percentage points as investors sought riskier, higher‑yielding assets. At the sector level, energy bonds performed well as oil prices moved higher. Floating rate loans also performed well.

UK Election Removes Some Brexit Uncertainty

Bonds in developed markets produced positive results in U.S. dollar terms as a weakening dollar aided returns of bonds denominated in local currencies. Yields of 10‑year sovereign bonds in most major markets moved higher. The British pound strengthened after the Conservative Party won a significant majority in parliamentary elections, paving the way for the UK to exit the European Union (EU) at the end of January. The removal of some Brexit uncertainty contributed to the month’s risk‑on environment globally, but the British government must still negotiate a new trade agreement with the EU by December 2020.

In Sweden, the central bank ended its negative interest rate policy after five years, raising rates from ‑0.25% to 0.0%. Inflation is expected to be close to the bank’s 2% target in coming years, and some policymakers also expressed concerns that negative rates were encouraging a buildup of debt. 

Emerging Market Central Banks Continue to Cut Rates

Emerging markets bonds were supported by investor demand for riskier assets amid strengthening growth expectations, and local currency bonds benefited from a weaker U.S. dollar. Emerging markets central banks continued on an accommodative course, with rate cuts announced in Mexico, Turkey, Brazil, and Ukraine. Oil‑producing countries were supported by OPEC’s decision to deepen production cuts.

Outlook: Opportunities in Securitized Sector

T. Rowe Price portfolio manager Ken Orchard believes that the securitized debt sector offers an attractive yield premium compared with Treasuries and, with shorter duration profiles, could provide some protection against a rise in government bond yields. In his view, non‑agency residential mortgage‑backed securities (RMBS) look particularly interesting as the combination of relatively low leverage and favorable risk/reward potential could gradually attract more investors seeking to diversify away from corporate debt. Overall, he says he prefers non‑agency RMBS to agency mortgage securities (which are government‑guaranteed) because the prices of non‑agency RMBS tend to fluctuate less when interest rates change.

Additional Disclosures
Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2020, J.P. Morgan Chase & Co. All rights reserved.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

GLOBAL CAPITAL MARKETS ENVIRONMENT

Stocks in the U.S. rose in December, capping a robust year, with several major indexes reaching all‑time highs. Strong economic data benefited stocks early in the month, as the Labor Department reported that employers had added 266,000 jobs in November, topping market expectations. The U.S. unemployment rate also fell to 3.5%, matching the five‑decade low that was reached in September. The Federal Reserve’s efforts to increase liquidity in short‑term lending markets through outright Treasury bill purchases, which expanded the Fed’s balance sheet, were also supportive.

U.S.‑China trade negotiations continued to influence investor sentiment, as both sides reached an agreement on a “phase one” trade deal. On December 13, Chinese officials held a press conference in Beijing announcing that a preliminary agreement had been reached to reduce U.S. tariffs on Chinese goods. As part of the agreement, the U.S. would lower the tariff rate on about USD 120 billion in Chinese goods from 15% to 7.5% while canceling the tariffs on USD 160 billion worth of Chinese goods that were scheduled to take effect on December 15. U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin released a statement announcing that the “historic and enforceable agreement” would require “structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange.”

Large‑cap shares marginally outperformed small‑ and mid‑caps. The large‑cap S&P 500 Index returned 3.02% versus 2.88% for the small‑cap Russell 2000 Index and 2.81% for the S&P MidCap 400 Index. As measured by various Russell indexes, value stocks outperformed growth among mid‑ and small‑cap shares, while growth narrowly outperformed value in large‑caps.

In the large‑cap universe, as measured by the S&P 500 Index, sector performance was mostly positive. Energy shares led the way and produced strong returns, as oil prices rose in part due to expected production cuts by oil‑producing nations into early 2020. Information technology and health care stocks also outperformed the broad index. In contrast, real estate and communication services shares lagged with mild gains. Industrials and business services stocks edged lower.

Domestic investment‑grade taxable bonds produced flat to negative returns as longer‑term interest rates increased. The Bloomberg Barclays U.S. Aggregate Bond Index returned ‑0.07%. Sector performance was narrowly mixed. Corporate bonds and mortgage‑ and asset‑backed securities produced marginal positive returns, but longer‑term U.S. Treasuries declined. Tax‑free municipal bonds outperformed the broad taxable bond market, albeit with mild gains. High yield bonds posted strong positive returns―supported by a rising stock market, expectations for a stronger economy and improving corporate profits in 2020, and rising oil prices that lifted issuers in the energy sector, a major part of the high yield universe.

U.S. Stock Returns
  S&P 500 Index S&P MidCap 400 Index Russell 2000 Index

December

 3.02%

  2.81%

 2.88%

Year-to-Date

31.49

26.20

25.52

Past performance is not a reliable indicator of future performance.
Sources: RIMES, as of December 31, 2019; Standard & Poor’s, LSE Group. See Additional Disclosures.

Stocks in developed non‑U.S. equity markets slightly outperformed U.S. stocks, as a weaker dollar versus major non‑U.S. currencies lifted returns to U.S. investors. The MSCI EAFE Index, which measures the performance of stocks in Europe, Australasia, and the Far East, returned 3.27%.

European stock markets were broadly positive amid signs of stabilization in the manufacturing industry and a reduction in U.S.‑China trade tensions. Oil producer Norway displayed the best returns, with gains approaching 7%. British stocks rallied over 5% in U.S. dollar terms following the decisive general election victory for Prime Minister Boris Johnson and his Conservative Party. Shortly after the election, the House of Commons voted in favor of the UK’s Withdrawal Agreement with the European Union (EU). As of this writing, the UK is scheduled to leave the EU on January 31, 2020, but the European Parliament needs to approve the Withdrawal Agreement. German stocks lagged the region and returned less than 2%.

Developed Asian markets rose broadly, as New Zealand shares led the way with a 5% gain. Japanese shares advanced over 2%, as investors welcomed Prime Minster Shinzo Abe’s fiscal stimulus package to offset the negative impacts of the October 1 sales tax increase, declining exports, and natural disasters. Hong Kong shares rose 4% even as the ongoing demonstrations and protests against the government continued to weigh on the economy.

U.S. Bond Returns
  Bloomberg Barclays
U.S. Aggregate Bond
Index

Bloomberg Barclays
Municipal Bond Index

J.P. Morgan Global
High Yield Index

December

‑0.07%

0.31%

 2.09%

Year-to-Date

 8.72

7.54

14.59

Past performance is not a reliable indicator of future performance.
Sources: RIMES, as of December 31, 2019; Bloomberg Index Services Limited, J.P. Morgan. See Additional Disclosures.

Emerging markets stocks strongly outperformed developed markets. The MSCI Emerging Markets Index returned 7.53%. Emerging Asian markets were mostly positive, as the region benefited from the announcement of the U.S.‑China “phase one” trade agreement. Chinese shares soared more than 8% in U.S. dollar terms. Stocks in South Korea, a major exporter, fared even better, rising more than 10%, while Indonesian and Taiwanese shares advanced more than 7%.

In emerging Europe, equity markets were mostly positive. Hungarian stocks led the central European region with a gain of almost 10% in U.S. dollar terms. Russian shares rose over 8% in dollar terms, helped by rising oil prices, a stronger ruble, and recent interest rate reductions from the central bank. Turkish shares returned about 2% in dollar terms, as a 3.5% drop in the lira versus the dollar reduced local returns to U.S. investors. Lira weakness stemmed from recent deep interest rate cuts, as well as tensions with the U.S. over the purchase of Russian military hardware.

In Latin America, shares were broadly positive. Argentine shares, which had been hammered earlier this year, were the top performers and advanced over 13% for the month as the new president, Alberto Fernandez, began his term. Chilean shares rebounded from recent lows, appreciating about 11% for the month in dollar terms—helped by a 7% rebound in the peso—despite continuing social protests against the government and economic inequality. In response to the protests, the government has adopted a new social agenda, announced an economic stimulus package, and made plans to revise the country’s constitution. Mexican shares rose almost 5% in dollar terms and the peso strengthened amid optimism that the United States‑Mexico‑Canada trade agreement intended to replace the North American Free Trade Agreement would soon take effect.

Non-U.S. Stock Returns
  MSCI EAFE Index MSCI Emerging Markets Index

December

 3.27%

 7.53%

Year-to-Date

22.66

18.88

Past performance is not a reliable indicator of future performance.
Sources: RIMES, as of December 31, 2019; MSCI. See Additional Disclosures.

Bonds in developed non‑U.S. markets produced positive returns in U.S. dollar terms. Bond prices slipped as yields edged higher in many markets, but a weaker greenback versus major currencies lifted returns to U.S. investors. In the UK, the easing of political concerns after the Conservative Party’s comfortable win in the general election drove gilt yields higher, while the British pound appreciated more than 2% against the dollar. Within the eurozone, improved risk appetite lifted core eurozone bond yields, and the euro strengthened versus the dollar. The European Central Bank left policy unchanged at its first meeting under the leadership of Christine Lagarde, who reiterated that policy needs to remain highly accommodative until inflation converges toward the bank’s objective. In Japan, government bond yields rose across the yield curve as the government announced a new fiscal package to boost the economy. Elsewhere, Sweden was in the spotlight as the country’s central bank lifted key interest rates out of negative territory.

Emerging markets bonds denominated in U.S. dollars produced strong returns in U.S. dollar terms. Local currency bonds outperformed dollar‑denominated emerging markets debt, as several emerging markets currencies―especially the Colombian peso, Chilean peso, Brazilian real, and South African rand—appreciated strongly against the dollar. Conversely, the Turkish lira was one of the few emerging markets currencies to decline, as the country’s central bank cut its one‑week repo rate from 14% to 12%.

Non-U.S. Bond Returns
  Bloomberg Barclays
Global Aggregate
Ex-U.S. Dollar Bond
Index

J.P. Morgan Emerging
Markets Bond
Index Global
Diversified

J.P. Morgan GBI-EM
Global Diversified
Index

December

 1.09%

  2.01%

  4.13%

Year-to-Date

 5.09

15.04

 13.47

Past performance is not a reliable indicator of future performance.
Sources: RIMES, as of December 31, 2019; Bloomberg Index Services Limited, J.P. Morgan. See Additional Disclosures.

Additional Disclosures
Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2020, J.P. Morgan Chase & Co. All rights reserved.

London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2020. FTSE Russell is a trading name of certain of the LSE Group companies. “Russell®” is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

The S&P 500 Index and S&P MidCap 400 Index are products of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”) and have been licensed for use by T. Rowe Price. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); T. Rowe Price is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index and S&P MidCap 400 Index.

Important Information
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

Emerging markets stocks rose in December as a de‑escalation in U.S.‑China trade tensions and interest rate cuts in several major emerging markets spurred demand for riskier assets. Sentiment picked up during the month on reports that the U.S. and China were drawing closer to a partial trade deal, culminating in a phase one trade agreement announced by both countries on December 13. Despite a lack of details regarding terms of the deal, investors appeared to view it as a reprieve in the escalating tariff cycle over the past nearly two years. Monetary easing across the developing world also lifted sentiment. Central banks in Brazil, Mexico, Russia, and Turkey cut their benchmark lending rates after the U.S. Federal Reserve left its key rate on hold on December 11. All 11 sectors in the MSCI Emerging Markets Index rose, led by information technology. Consumer staples stocks added the least.

Total Returns
MSCI Index December Year-to-Date
Emerging Markets (EM)   7.53% 18.88%
EM Asia   7.18 19.65
EM Europe, Middle East, and Africa (EMEA)   7.10 16.26
EM Latin America 10.41 17.89

Past performance is not a reliable indicator of future performance.
All data are in U.S. dollars as of December 31, 2019. This table is shown for illustrative purposes only and does not represent the performance of any specific security.
Source: MSCI. See Additional Disclosures.

Chinese Stocks Rally as Traders Anticipate Interim U.S. Trade Deal; Southeast Asian Stocks Gain

  •  Chinese stocks rallied as expectations of a partial trade deal with the U.S. and recent domestic stimulus measures eased some of the growth headwinds on China’s economy. Both U.S. dollar‑denominated shares and yuan‑denominated A shares added more than 8%.
  • Indian stocks rose slightly as investors anticipated stronger economic growth in 2020. India’s central bank kept its benchmark interest rate at 5.15%, defying forecasts for a rate cut, after inflation picked up in October. The bank’s unexpected pause came days after India reported that its economy grew 4.5% in the third quarter from a year ago, its weakest pace in more than six years.
  • Southeast Asian stocks advanced, led by Indonesia’s roughly 7% gain. Central banks in Thailand, Indonesia, and the Philippines left their benchmark rates on hold. The Asian Development Bank lowered its 2019 and 2020 growth estimates for developing Asia, including Southeast Asia, from its September forecasts, citing U.S.‑China trade tensions and slowing global trade and economic activity. 

Brazilian Stocks Surge as GDP Data Shows Economy Improving; Andean Markets Rebound After Sell‑Off

  • Brazilian stocks surged more than 12%, lifted by data showing the economy was firmly recovering. Brazil’s gross domestic product (GDP) rose 0.6% in the third quarter from the second quarter and grew 1.2% from a year earlier, the statistics institute reported. The institute also revised its growth data for the second quarter and 2018 upward. Brazil’s central bank lowered its benchmark interest rate to a record low 4.5%, its fourth straight half‑point rate cut, and signaled that further easing was possible.
  • Mexican stocks added nearly 5% as momentum to pass a new trade deal among the U.S., Mexico, and Canada picked up in the U.S. Congress, eventually winning bipartisan approval in the House of Representatives. The deal, which replaces the 1994 North American Free Trade Agreement, eased uncertainty about the future of U.S.‑Mexico trade relations. Mexico’s central bank cut its key interest rate for the fourth straight meeting after inflation fell to its 3% target.
  • Andean markets advanced, led by double‑digit gains in Chile and Colombia as their stock markets rebounded from steep declines in November sparked by antigovernment protests in each country. Currencies in Chile and Colombia gained more than 7% against the U.S. dollar after sinking to record lows versus the dollar last month. Stocks in Peru, which has avoided the unrest affecting other Latin American countries, rose about 2%. Central banks in all three Andean markets kept their benchmark rates on hold. 

South African Stocks Rally as Risk Appetite Offsets Weak GDP Data; Turkish Stocks Advance

  • Russian stocks gained more than 8%, buoyed by currency strength and diminished concerns about U.S. sanctions. Russia’s central bank cut its benchmark interest rate by a quarter‑point to 6.25%, its fifth rate cut in 2019, and signaled that it may further reduce rates in the first half of 2020. The ruble gained more than 3% in December amid strong demand for Russian assets.
  • South African stocks rallied almost 10% as demand for riskier assets outweighed poor economic data. South Africa’s economy shrank 0.6% in the third quarter from the previous quarter and barely grew from a year ago, the country’s statistics office reported. The latest quarter marked South Africa’s second economic contraction in 2019 and raised expectations that the country would lose its last remaining investment‑grade credit rating from Moody’s.
  • Turkish stocks rose slightly despite data suggesting that the economy’s nascent recovery is already flagging. Turkey’s economy grew 0.4% in the third quarter from the second quarter and rose 0.9% from a year ago. However, the latest quarter’s growth lagged forecasts and raised concerns that the government would continue to spend heavily to boost demand at the risk of fanning inflation. Turkey’s central bank subsequently cut its policy rate by an unexpectedly large 200 basis points to 12% as its aggressive easing cycle continued. 

Solid Fundamentals in Emerging Markets Offset Near‑Term Risks

We are optimistic about the long‑term outlook for emerging markets. Most developing countries have smaller current account deficits, larger foreign exchange reserves, and more flexible currencies than they did in previous decades, reducing the risk of a financial crisis. Compared with developed markets, most emerging markets have more attractive demographics and a stronger tailwind from rising consumption. Corporate earnings in emerging markets have recovered after years of disappointing performance, and valuations for many companies are attractive compared with their developed markets peers. Trade tensions, political unrest in a few markets, and slowing global growth represent the most pressing near‑term risks. However, we believe that careful stock selection based on intensive research remains the key driver of long‑term performance as individual emerging markets countries and companies continue to show wide dispersion in their returns. 

Additional Disclosures
MSCI and its affiliates and third‑party sources and providers (collectively, MSCI) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast, or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

Important Information
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

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