It was a no-lose situation for investors in the S&P 500 in 2019 as all 11 trading strategies tracked by S&P Dow Jones Indices generated positive returns, but the greatest rewards were accrued by the most aggressive traders.
While the S&P 500 index rose 28.9% last year, High Beta, which tracks stocks most sensitive to changes in performance, returned 32.6%, according to SPDJI Factor Indices. That represents a reversal of 2018, when High Beta was the biggest loser with a negative return of 16.5% as the S&P 500 index slid 6.2%.
The runner-up in 2019 was high quality, which earned investors 31.4% with its focus on stocks with the highest returns on equity and a low leverage ratio, while third was Buyback, which tracks the 100 companies that have bought the most of their own stock in the previous quarter. The worst-performing trading strategy, the Quality, Value & Momentum Multi-Factor, still returned 23.4%.
The fortunes of many of the trading strategies changed rapidly in the fourth quarter as Low Volatility, which had dominated for the first nine months of the year, was the worst performer with a 0.8% gain, while High Beta surged ahead with an 11.5% return.
Last year's equity rally defied slowing economic growth both in the U.S. and globally, as well as a trade war between the U.S. and China, which periodically spooked markets in 2019 but not enough to stop the S&P 500 from delivering its second-best returns this century.
A number of competing forces are at play that could affect equity markets in 2020, including the forthcoming presidential election, according to Christopher Bennett, director index investment strategy at S&P Dow Jones Indices.
"Election years are traditionally good for U.S. equities," Bennett said. "A big question will be what we should expect from central banks. The U.S. Fed has indicated that it is on hold this year, while the European Central Bank has called for fiscal stimulus to replace the efforts of central banks."
U.S. equity markets did well last year despite lower corporate earnings, something that is predicted to continue into 2020.
"Equity markets already appear to be pricing in an economic rebound and in the absence of a significant liquidity impulse and further re-rating, returns are likely to be constrained to single digits," said Keith Wade, chief economist at Schroders, a U.K.-based asset manager with more than £400 billion under management.
The record-breaking decadelong bull run in the S&P 500 has been led by the success of major tech firms Apple Inc., Microsoft Corp., Alphabet Inc., Facebook Inc. and Amazon.com Inc., something that is difficult for factor investing strategies to capture because they give equal weighting to all companies.
While the High Beta strategy did well in 2019, it could not compete with those who invested in the S&P 500 Information Technology index, which returned 48%.
"A select few companies are playing an uncommonly significant part in the market’s performance. Their recent outperformance is the main reason that equal weight strategies have recently trailed behind [the S&P 500]," Bennett said.