NEW YORK -- Break out the Spice Girls CDs. That was one of the best years in decades for funds.
Funds of all types made money through 2019, from risky ones full of stocks from developing economies to stodgy funds holding only super-safe Treasury bonds. Someone who came into 2019 with their money split between the largest U.S. stock and U.S. bond funds made 19.6% last year. That's the most since the Spice Girls and Notorious B.I.G. were topping the charts in 1997 and Vanguard's Total Stock Market Index and Total Bond Market Index funds returned a composite 20.2%.
Give credit to central banks around the world, which cut interest rates and unleashed stimulus in hopes of goosing the global economy amid low inflation. The moves helped silence a warning bell of recession that sounded in the U.S. bond market during the summer, the first time that had happened since the run-up to the Great Recession. A truce in the trade war between the U.S. and China also gave the markets a lift toward year's end.
Yet, even though markets steadily rose to one of their best years since the days of Fruitopia, many investors simply couldn't stomach joining the ride — or even staying on it.
“Investors generally are nervous,” said Greg Davis, chief investment officer at Vanguard. “There's uncertainty given all the trade concerns, uncertainty around fiscal policy, and it's been a reluctant rally.”
Investors yanked $130 billion out of U.S. stock mutual funds and ETFs through the first 10 months of the year, according to the Investment Company Institute. Over the same time, they poured $363 billion into bond funds. Another $445 billion went into money-market funds as some investors preferred to huddle in the safety of cash.
Here's a look at some of the trends that shaped the year for fund investors:
— STOCKS VERSUS BONDS
Normally, bond funds do well when there are concerns about the health of the economy. Stock funds, meanwhile, do well when investors see bigger profits ahead for companies.
In 2019, both stock and bond funds logged strong returns and rebounded from a rough 2018. The average fund invested in a mix of large U.S. stocks returned 28.6%, as of Dec. 23, while the average intermediate-term core bond fund returned 7.8%, according to Morningstar.
Stock funds rose even though profits fell for many companies: S&P 500 earnings per share fell in each of the first three quarters compared with prior-year levels, according to FactSet. That's because a stock's price ultimately depends on two things: how much profit a company makes and how much investors are willing to pay for each $1 of that profit. In 2019, investors were willing to pay more for those profits. A big part of that was low interest rates — the Federal Reserve cut rates in 2019 for the first time in more than a decade, and low rates make stocks look more attractive as investments versus bonds.
Bond funds, meanwhile, rallied to strong returns in part because rates fell through the year. When rates are dropping, prices rise for bonds in funds' portfolios because their yields suddenly look more attractive in comparison.
— US STOCKS VERSUS FOREIGN
Foreign stocks rebounded in 2019 following a dismal 2018. The average fund focusing on stocks from emerging markets returned 18.4% through Dec. 23, for example, a sharp turnaround from a loss of 16.1% the prior year.
The tamping down of tensions in the U.S.-China trade war helped in particular. Chinese stocks can make up more than a third of emerging-market stock funds, and many stocks from other developing economies are also dependent on global trade, which has been hurt by tariffs and uncertainty.
Funds that invest in a mix of developed and emerging foreign stocks did even better. Economic growth remains weak in Europe and Japan, but central banks there are keeping the accelerator floored on stimulus. The European Central Bank late in the year said it was restarting its bond-purchasing program, for example, and interest rates remain negative across Europe and Japan.
Still, U.S. stock funds pulled even further ahead of their foreign counterparts, again. For much of the last decade, U.S. stocks have been the clear winners of the global race for returns because the U.S. economy's growth has been more solid than the rest of the world's. The largest U.S. stock fund returned 30.4% in 2019 as of Dec. 23, versus 20.8% for the largest foreign stock fund.
To put 2019's performance in perspective, it followed a nearly equally dismal 2018 when worries about a possible recession and President Donald Trump's trade war sent markets around the world tumbling.
For instance, Vanguard's Total International Stock Index fund rocketed to a 20.8% return in 2019 through Dec. 23. But after including the sharp loss of 2018, it's up just 3.4% since the end of 2017.
Of course, anyone who bailed in 2019 missed out, and Wall Street analysts expect that investors' fortitude will be tested again in the new year.