November was a good month for developed equity markets. The US led the way with a 3.63% return for the S&P 500 and 4.12% for the Russell 2000. Foreign developed markets were not as strong but still posted a positive return of 1.13%. Emerging markets were the laggard with a small loss on the month. In the fixed market, not a lot happened. Interest rates ticked up a bit, but capital losses on bonds were largely offset by income generated.
As we turn our attention towards the New Year, we think it is helpful to reflect on the previous year. We entered 2019 with most commentators bearish and the Fed perceived to be overly hawkish with most economists expecting rates to rise. We think the market started to price in a Fed-induced contraction in the economy and the yield curve inverted. Over the course of the year, the tone from the Fed changed from hawkish to dovish, it then began an easing cycle, and asset prices reacted accordingly. While stock investors fared better than bond investors, both categories of investment have generated healthy returns this year.
As the stock market marched higher, corporate earnings contracted a bit year-over-year. So, the rally in stock prices was a function of valuation change rather than growth in earnings. There are a lot of theories as to why corporate earnings contracted in 2019. Some observers blame the uncertainty around tariffs and trade policy, while some say it reflects a modest slowdown in economic activity. Others point to this being an optics issue with difficult year-over-year comparisons due to the 2018 corporate tax cuts. We think the year-over-year declines in earnings are attributable to each of these things to varying degrees, but the extent to which they are to blame is context and industry dependent.
Looking into 2020, we now have a market with a fuller valuation but one with expectations of recovering corporate earnings. We tend to think that all else equal, stock prices follow earnings and cash flows over time, and we see no reason for that to change. We have low interest rates, but we also have modest growth and low inflation, so we would expect rates to remain low and those low rates to be supportive of valuations. To the extent there are downside risks to growth in the economy we think there are comparable downside risks to rates.
We would be remiss when discussing 2020 if we did not mention that it is also a US Presidential election year, as you are probably aware. We would expect the outcome of the election to have some impact on markets, how the economic pie gets split among industries, and potentially some impact on the growth rate of the underlying economy. At this point, too much is unknown to make too many predictions. The one prediction we feel comfortable making is that regardless of the result, approximately half the country will be unhappy with it. That in and of itself does not necessarily mean the outcome will be good or bad for markets.