Trade Clarity & Interest Rate Cuts Lead to Big Returns in 2019.
Markets welcomed the resolution of several key macroeconomic unknowns in the fourth quarter, and that clarity sent the broader stock market higher over the past three months. Solid 4Q gains helped the S&P 500 index achieve its best annual return since 2013.
At the start of the fourth quarter, markets faced four significant uncertainties: Could the U.S. and China strike a trade deal? Would the Fed cut interest rates for a third time in 2019? Could U.S. and global economies stabilize? Would Brexit get passed? Each of these unknowns, which weighed on markets earlier in 2019, saw positive progress in the last three months of the year.
By far, most important was the agreement to a “phase one” trade deal by the U.S. and China. Since early 2018, the U.S.-China trade war pressured the global economy and weighed heavily on investor sentiment. Twice in 2019, tariff increases spiked market volatility.
In mid-October, the US and China agreed to a phase one trade deal that would result in the reduction of some existing tariffs, the promise of no additional tariffs, and increased imports of American goods by China. Anticipation of this “in principle” deal powered stocks up from mid-October through mid-December. The announcement of details of the deal on December 13 extended the rally to year-end.
This was not the only positive event. The Federal Reserve met market expectations by cutting interest rates another 25 basis points at its October 30 meeting. That cut made total reduction in interest rates to 75 basis points, the largest annual reduction in over a decade. Then, the Federal Open Market Committee stated at its December policy meeting they expect no increase in interest rates in 2020. That clarity for Fed policy expectations helped power stocks higher in the 4Q.
US and global economies showed signs of stabilization in the 4Q after losing positive momentum for much of 2019. First, in the US, concerns were growing that sluggish business spending and investment could cause a broader slowdown. But Durable Goods, the market’s preferred measure, rebounded in 4Q, easing most of those concerns. Internationally, Chinese manufacturing, which had shown contraction for the past several months, turned positive again in December, which implied activity was stabilizing. So, while concerns remain about the global economy’s direction, signs of progress helped stocks rally.
Finally, after 3½ years of Brexit uncertainty, investors can expect progress as December elections in the UK resulted in a strong conservative (Tory) party majority. This means an agreement should pass Parliament in early 2020.
In sum, the fourth quarter of 2019 reminds us macroeconomic fundamentals matter, and positive news on four key macroeconomic fronts fueled a broad rally in the stock market. This makes it more likely, though not certain, we see improved global economic growth and better earnings in 2020.
Commodities enjoyed strong gains this quarter, led higher by a rally in oil while gold saw a more modest rally. Oil rose thanks to the decision by “OPEC+” to cut production, combined with the U.S.-China trade deal raising expectations for global growth and future demand. Gold spent much of the quarter in negative territory as investors rotated into more risky assets after de-escalation of the U.S.-China trade war. Late-year decline in the U.S. Dollar and mild increase in geo-political tensions, helped gold rally late in December and register a positive return for the quarter. For 2019, commodities produced positive returns driven by large gains in oil , although as an asset class, commodities lagged the S&P 500.
1Q & 2020 Market Outlook
Market performance in 2019 shows the difference a year can make. Last January, the S&P 500 was coming out of its first negative year in a decade; worries about the global economy surged due to the U.S.-China trade war and the Federal Reserve just hiked interest rates the previous month.
But 2020 begins on the opposite end of the spectrum. The S&P 500 just registered its best annual return since 2013, worries about the global economy are receding thanks to the U.S.-China trade deal and the Fed cut interest rates three times in 2019.
The takeaway from this is clear: What happened last year doesn’t mean much for predicting what markets will do this year.
Put in more familiar phrasing: Past performance is not indicative of future results.
So, while the macroeconomic environment is favorable as we begin 2020, new years always brings new challenges, especially in an election year. We are monitoring several unknowns that, with the market at historically high levels, could bring volatility.
Bottom line, the fundamental outlook for the economy has improved since the correction in 2018, and stocks responded accordingly. But despite strong performance in 2019, since markets face uncertainties, we are committed to watch these situations and their impact on the markets and your portfolio.
At Brixton Capital Wealth Advisors, we’ve been through both good and bad markets, and we will not be complacent after a year of strong annual returns. We are committed to helping you navigate this ever-changing market environment, with a eye on continued progress on your long-term investment goals.
Our experience has taught us successful investing is a marathon, not a sprint.