It's only a slight exaggeration to say that 2019 was a year that rose out of the ashes of the fourth quarter of 2018. People’s memories seem to be getting shorter, so it can be easy to forget how bad that quarter was. Technically, the economy entered a bear market in December, though many may not have realized it at the time. The reason being, most people measure such things at the close of trading each day, and while the market did hit a point where it was down 20% from its peak, it didn’t close that way. If it had, economists would be either talking about a new bull market or looking for a catalyst to set the stage for one. Given the speed of the market’s recovery, benefited by several record-setting highs, it is safe to assume that the longest-running bull market in history continues unabated, likely with more to come. The past year returned exceptional results in virtually every category, including fixed income.
December was another great month – indexes gained across the board, except for the U.S. Aggregate Bond Index, which dipped ever so slightly. The S&P 500 returned over 31%, the NASDAQ over 36%, and the EAFE over 18%. Falling interest rates, healthy consumer demand, low unemployment, and little to no new regulation from Washington all contributed to the success of the year that was. It’s probably fair to say that 2020 won’t match that success, though it still could be decent.
Last year was defined by three distinct elements that affected the markets: The Fed, the consumer, and trade.
- The Fed came to the rescue after almost singlehandedly causing a bear market in 2018. Back then, trade issues were becoming front-page news, but the Fed raising rates and, more importantly, not giving the markets a clear direction as to their outlook caused a lot of uncertainty in the minds of investors. The markets sold off until such time as the Fed finally provided some clarity to its policies and ultimately indicated its willingness to cut rates. While the Fed has continued to give some mixed signals, its movement from raising rates toward cutting them helped fuel the rally. The Fed has since paused in explicitly raising or cutting rates, which the markets seem to be comfortable with, although they continue to juice the markets by expanding their balance sheet.
- Since the consumer comprises approximately two-thirds of the U.S. economy, a happy and spending one makes a huge difference not only domestically, but globally as well. With unemployment at historic lows, consumer sentiment was not impacted by job concerns, allowing people to open their wallets worry-free. By continuing to spend, businesses sold more goods and services and were able to withstand the effects of a trade war and a changing retail landscape. So not to be dramatic, but for the world’s benefit, please get out there and spend, Spend, SPEND!
- Perhaps the biggest drag on the economy was trade issues with China, Europe, Canada, and Mexico. Though trade and tariffs dominated the headlines, such news meant very little to U.S. consumers, and not that much to investors either. Yes, companies cut back on spending and manufacturing, and manufacturing essentially entered a recessionary phase, but those companies also continued to hire, didn’t lay anyone off, and raised wages. Earnings suffered (flat to negative on the S&P 500) and tariffs reduced U.S. GDP (estimates from 0.5% to 1%), but consumers were largely insulated because the tariffs did not affect them directly.
This year will likely bring similar challenges to those expected heading into 2019 (a slowing economy, trade issues, earnings challenges), as well as a few new ones (tensions with Iran, impeachment issues, a presidential election). However, the difference in mood this year is striking – in a good way. The trade picture is expected to clear up, as agreements with China, Mexico, and Canada become finalized.
Corporate earnings should rebound, with growth expectations ranging from 7% to 10% over the next 12 months. Because overall earnings did not grow in 2019, the market rally came as a result of expanding valuations; there will need to be some catch-up in 2020 and beyond, as valuation expansion is likely limited going forward. Even with forecasted earnings growth, the markets likely won’t move substantially higher in 2020. GDP is expected to slow to around 1.8% to 2%, largely because much of U.S. GDP comes from an expanding workforce and rising productivity, both of which may be limited in 2020.
Political issues such as impeachment and the election certainly matter, but the likely scenario is that impeachment will go nowhere in the Senate (if it ever gets there), and presidential election years, while sometimes volatile, tend to be positive for the markets. Finally, the economy is certainly in the latter stages of this growth cycle, which means that growth will continue to slow and eventually recession will set in. However, bull markets and growth cycles don’t simply die of old age; something has to cause them to end, although that something is often not apparent in real time. For now, it looks like 2020 will show continued economic growth, albeit at a low rate, and that the bull market will continue to run, but at a more measured pace.
December came and went in a flash, and now it’s time to settle in to the New Year. That makes this the perfect time to schedule a meeting with your trust officer to review and update your goals, objectives, and risk tolerance level, to make sure your asset allocation is set accordingly. Please feel free to call me at (608) 826-3570 or email me with questions.