I think if you go back to early January last year, not too many people were expecting such a bumper year of ASX returns. The US Federal Reserve was still telling us they were hiking interest rates in 2019, the US–China Trade War was heating up and things looked pretty bleak with yield curve inversions and other 'recession warning lights'.
Of course, the Fed ended up cutting interest rates twice in 2019, the US has reached a 'Phase one' trade war deal with China and the ASX recorded one of its best years since the GFC.
The S&P/ASX 200 (INDEXASX: XJO) ended up banking a 20.3% gain for 2019 (which doesn't include dividend returns), whilst the ALL ORDINARIES (INDEXASX: XAO) returned close to 21% for the year.
Considering the ASX markets have historically returned an average of around 8–10% per annum (including dividend returns), it's fairly safe (in my opinion) to describe 2019 as an outlier.
What made 2019 such a good year?
There were several macro-trends that contributed to 2019's success that are unlikely to be repeated this year.
Firstly, our own Aussie dollar spent 2019 falling in value against the US dollar. In January of last year, one Aussie dollar was buying around 72 US cents. We saw this rate go as low as 67 cents during the year – the lowest levels since the GFC. A lower dollar boosts the returns and profits of many ASX companies, especially those who export their products or derive earnings from overseas.
Lowering interest rates have also contributed to last year's market gains. The Reserve Bank of Australia lowered the cash rate three times in 2019 (from 1.5% to 0.75%). Lower interest rates have a positive effect on shares because of the increased unattractiveness of other 'safer' asset classes like government bonds and term deposits.
Other political events like the US–China trade war ceasefire and the unexpected victory of the Coalition government also contributed to the bullish sentiment of last year. Labor's plans to scrap negative gearing for properties as well as cash refunds for dividend franking credits and a change to the existing capital gains tax discount weren't exactly getting investors excited. The party's unexpected loss did, though.
Foolish takeaway
Looking forward to this year, it seems unlikely that many of these factors will be sticking around in 2020 (apart from interest rates). Thus, I wouldn't be necessarily expecting a repeat performance from the ASX this year. Something to keep in mind as we all get our portfolios ready for the year to come!
