What a Long, Strange, Record-Setting Trip It’s Been…
When we began 2019, the S&P 500 was cratering in the face of trade wars, a government shutdown, a tightening Fed and freezing credit markets. Fast forward to the fourth quarter where we basked in record highs for the S&P 500 as well as for the Dow Jones Industrial Average and Nasdaq. How did we get here? Despite the year-long fears of the impending End of the Expansion, as 2019 moved forward the Fed’s interest rate cuts combined with movement in U.S.-China trade negotiations drove investor optimism, and we saw an overall improved economic outlook. Gold and oil both grew by over 10% while across the pond, emerging clarity around Brexit helped foreign markets also post sizable Q4 gains. After a big run to the end of the year, here’s where our economic conditions settled in Q4:
U.S. – Weak Manufacturing, Strong Employment
GDP: Manufacturing stood out as the domestic economic weak spot for Q4. The Institute for Supply Management’s Factory Purchasing Managers index stayed below 50 for the duration of the quarter, indicating an economic sector that is shrinking. After a revision in Q4, the Bureau of Economic Analysis’ Q3 gross domestic product estimate stands at 2.1%. 
UNEMPLOYMENT: Surprising labor market analysts, the Department of Labor reported an increase in hiring. Numbers reflected an economy picking up momentum rather than one slowing down, with 156,000 net new jobs added by employers in October, and a jump to 266,000 in November. Unemployment rates, as well as the underemployed, trended downward from October to November. 
HOUSING: The pace of home buying slowed as we progressed later into the year, but 2018 to 2019 comparisons are still showing slight gains. The median existing home sale price was up 5.4% year over year in November; additionally, new housing developments and permits for future projects also gained over 2018. New home sales fell almost 3% in October, then bounced back with a 1.3% gain a month later according to an estimation of the Census Bureau. [1,6]
INTERNATIONAL: Weak Manufacturing, Strengthening Brexit Confidence
Germany’s poor manufacturing returns led the trend of weakening Eurozone factory sector numbers. 2 Despite a slight gain in export orders, manufacturing numbers in China declined throughout the last quarter of the year. Addressing their continually contracting economy, the Chinese government announced it was relaxing the cash reserve requirements for the nation’s banks, effectively pouring another 800 billion yuan into China’s financial system. [2,3]
The U.K.’s conservatives won a decisive victory in December’s general election, and with Boris Johnson remaining as Prime Minister confidence in an approved revised Brexit deal by the extended January 31st deadline increased. Once the saga of Brexit finally concludes, 2020 brings the looming task of forging a working trade pact with the E.U.[4 ]
Full Steam Ahead
US EQUITIES: The S&P 500’s rise to new highs in Q4 wasn’t a solo adventure: its gain of 9.07% was accompanied by mid-caps with a 7.06% gain and small-caps gaining nearly 10%. Propelled by Amazon and Apple, Big Tech saw a 12% gain in the quarter. The Dow Jones Industrial Average and the Nasdaq Composite both hit new highs, ending the year above 28600 and 9000, respectively. [1,2]
DEVELOPED INTERNATIONAL EQUITIES: Overseas, equity markets enjoyed the risk- on attitude as well. The MSCI EAFE index, a benchmark for developed equity markets in Europe and the Asia-Pacific region, improved over 9% in Q4. [1,2]
EMERGING MARKETS: Emerging market benchmarks made the largest advances of all equity indices with overall gains at nearly 12%. Most notably, Argentina’s Merval jumped over 43%; Russia’s RTS rose over 16%.[1,2]
Rate Drop and a Fed Hold
U.S. FIXED INCOME: The Federal Reserve made its third interest rate cut of the year in October, then it signaled that it may not adjust short-term interest rates for all of 2020. The U.S. Aggregate index added only 0.14% during Q4 but ended the year with a stellar gain of 8.87%. 
DEVELOPED INTERNATIONAL FIXED INCOME: After a strong start, bonds overseas recorded a 1.25% loss for Q4 but made an overall 8.6% return for the year.
Trade… Deal or No Deal?
The progress in U.S.-China trade negotiations helped propel markets in Q4, and in mid-December it was announced the two nations had agreed to an 86-page text detailing the first phase of a broader trade agreement. It will involve reduced tariffs in exchange for more Chinese purchases of American farm goods such as soybeans and pork as well as commitments on intellectual property, forced technology transfer and currency markets. The fine print will be revealed sometime in January when it’s officially signed, but the consensus is that it may take months to years to assess whether the deal works as advertised. Some opponents were quick to judge the limited agreement, arguing that the president had sold out because all the big issues aren’t resolved by it. Others fear that enforcement will prove to be too difficult. U.S. Trade Representative Robert Lighthizer acknowledged to reporters that although “the hardest part” has been accomplished – actually putting an initial deal to paper – a “huge amount” is outstanding and must be resolved in future negotiating phases. After the Phase One deal is finally signed in January, investors will no doubt look ahead to a Phase Two deal for something more concrete. That said, despite the actual details of the deal(s), markets have fully embraced the de- escalation of the trade war and the reduction or delay in tariffs. One thing is certain going into 2020: with the presidential election looming later in the year, you can be sure that everything will be done to ensure that the good times keep rolling.
DPWM 2020 OUTLOOK:
Aware of the Risk, Ready for Opportunity
2019 actualities bucked the doom and gloom that seemed to enter the year with us. Monetary stimulus, economic stabilization, and reductions in geopolitical risk and trade tensions resulted in a surprisingly stellar year for assets across the board. In addition to the over 10% gains seen by the S&P 500, gold and crude oil, the 10-year Treasury yield has fallen from around 2.7% at the end of last year to a recent 1.934% — three-quarters of a percentage point. That hasn’t happened in any year since at least 1984, according to Dow Jones Market Data. In fact, all asset classes were positive last year, with cash recording the lowest positive return at 2.2%, something not seen since 2006. In the end, it was a rare ascent for risky and safe assets alike.
2020, however, is promising volatility. Some investors have already started positioning for the anticipated turbulence around the U.S. presidential election, and global factors continue to increase. In the face of continuing trade spats – some that involve us (China) and some that don’t (U.K. & E.U.) – you’ll see in the chart below that most measures of valuations for the S&P 500 appear stretched. Concerns over Iran/Iraq, inflation, tightening Central banks and high stock prices will only add to the volatility.
While a repeat of the relative calm and impressive gains seen in 2019 is highly unlikely, we may see a continuation in the growth of the global economy thanks to the easing in monetary policies as well as the temporary trade truce between the U.S. and China. The U.S. consumer remains strong, and foreign governments are employing stimulus tactics. At DPWM, we know that we are facing a considerably changing market and political landscape in 2020. In the face of a new year fraught with new investor fears, we emphasize diversified portfolios built around fundamentally sound asset classes. As always, we remain ready to identify areas where increased volatility may unlock new opportunity for our clients.
1 – com/economic-calendar [12/31/19]
2 – com/articles/daily-markets%3A-2020-looks-to-begin-the-way-2019-ended-2020-01-02 [1/2/20]
3 – asiatimes.com/2020/01/article/china-slowing-caixin-purchasing-mgr-data-confirm/ [1/2/20]
4 – forbes.com/sites/pascaledavies/2019/12/15/for-europe-the-brexit-battle-is-just-getting-started [12/15/19]
5 – barchart.com/stocks/indices/world-indices?viewName=performance [12/31/19]
6 – economy.com/united-states/residential-housing-starts [1/2/20]
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