The tide turned on interest rates in the fourth quarter of 2019. The 10-year U.S. Treasury note yield reached a low for the year in September, hitting 1.46%. In October, the Federal Reserve cut rates for the final time in 2019. The market responded by taking a more measured view over future rate moves, with many if not most participants believing that the Fed will be on hold in 2020. The Fed gave similar indications. Some signs of improving economic life came from overseas, employment domestically was still strong, and wage growth for lower paid workers began to pick up. As trade tensions eased with improved prospects of a “phase one” deal with China, rates began to rise, and the yield curve steepened modestly.
Despite an approximate 30 basis point rise in rates, the fourth quarter felt rather subdued compared to the tumult that was the first three quarters of the year. Financial markets finished the decade in incredible fashion. The Treasury bond rally that had begun in late 2018 continued virtually unabated into September, with the 10-year yield down over 160 basis points from its prior year peak. There was heavy and consequential news flow during the year (more on that below) but the big news came from the Federal Reserve. Low inflation, an inverted yield curve, and the need to “insure” that the economic expansion would not run out of steam led to a sea-change in the Fed’s view bringing not only an end to the trend of rate hikes, but three rate cuts over the course of the year. “Risk-on” became the mantra, with investment grade corporate bonds and high yield having banner total return years. Lest anyone believe that equity markets and bond prices wouldn’t rally at the same time, the S&P reached record highs with remarkedly few significant corrections, closing the year up 31%. With low inflation and a strong stock market, who would have expected gold to return 18% for 2019?