Q4 2019 Market Review
Just a year ago, we were coming off of the worst December since the Great Depression and the worst year for stocks since 2008. Most investors experienced negative returns in 2018 for the first time in a decade. While the economic outlook wasn’t as gloomy as the media suggested, market watchers were very divided on whether it was just a blip or if a bear market was ahead. Flash forward a year, and the S&P 500 Index rose almost 10% in just the fourth quarter of 2019 and ended the year up 28.9%. It was a strong year across all of the indexes, with the Nasdaq up 35% and the Dow Jones Industrial Average by 22%. The rally was not just limited to stocks, as the Barclay’s Aggregate Bond Index was also up 9%, and commodities such as gold rose 18.7%.
One of the biggest uncertainties coming into 2019 was the ongoing trade war with China as tariffs continued to weigh on the global economy. Since the trade war began in 2018, growth in gross domestic product (GDP) has slowed but continued to beat expectations in each of the first three quarters of 2019. We won’t know the Q4 19 numbers until the end of January, but most estimates expect growth to remain on track. Despite a flattening of corporate earnings, many companies beat their estimates, the employment market remained strong, and retail sales also remained strong as consumers continued to spend. As we saw the indexes reach new highs, momentum took over through the year, and we found ourselves with a market that was its best in nearly two decades.
Impact of Federal Reserve
To figure out how we got here, we can look to the Federal Reserve. The Fed, which raised interest rates four times in 2018, reversed course last year with a more dovish stance and cut interest rates three times due to concerns about the global growth slowdown and the ongoing trade war with China. Put simply, lower rates encourage spending by making it cheaper to borrow. The central bank also started to pump money into the market through the buyback of billions of repurchase agreements and Treasury bills. Although the Fed stated that these purchases were a technical adjustment to stabilize short-term rates and not one meant to boost the economy, these moves proved to drive a market rally we haven’t seen in years. While the Fed played a significant role in driving returns last year, that will likely start to taper off this year as a reduction in repurchase operations is scheduled after January. Rate changes also appear to be on hold as inflation is still quite low by historical standards, although U.S. consumer prices rose slightly in December.
Moving Forward in 2020
So, where does that leave us for 2020? We saw U.S. equities rising by multiples last year not supported by earnings growth, leaving the S&P 500 much more expensive than at the start of the year and looking more and more overvalued. The mismatch between the two means that we will need to see an acceleration in earnings growth this year to sustain current valuations. The 4th quarter earnings season begins this week, and if corporate profits don’t catch up, stocks could stumble this year. As for the bond market, that has soared as well, but as corporations have taken on more and more debt, investors could be inclined to sell if they think these companies are taking on too much risk. It’s not all doom and gloom, and there are a lot of bright spots as well – the economy is still growing, labor markets and consumer spending are strong, and interest rates and inflation are low. Global recession fears are dampened for now with the first phase of the trade agreement signed, but investors will be watching closely as the U.S. begins negotiating with China phase two of the deal. There are also geopolitical risks such as the conflict in the Middle East, Brexit, and of course, the 2020 presidential election is this November.
I wish we had 20/20 vision into 2020, but we don’t! The best bet is focusing on long-term goals and objectives, and we are closely watching the markets and are always looking at the fundamentals - over the long-term, it always comes back to fundamentals. We are also making sure that we have enough cash in client portfolios to meet any liquidity needs. Please continue to communicate with us, and we are here if you have any questions.
Our team at Aevitas wishes you a happy and healthy New Year!