2019 Market Review
What a year! In 2019, investors had their cake and ate it, too. The U.S. stock market had its best year since 2013 and continued its steadfast rally since the 2008 downturn. Since the turn of the year, we are about six months into the longest-running bull market in U.S. history. There’s plenty to celebrate over last year, but outlook for 2020 is mixed.
In the U.S.
The Market Skyrocketed
The U.S. stock market rose a whopping 30% in 2019 as measured by the S&P 500 index, a market index made up of 500 of the largest companies in America. The Nasdaq, a more technology-heavy group of stocks, returned even more at 35%. Finally, the Dow Jones Industrial Average rose 22%. The year made up for the 6% downturn posted in the year prior following a steep selloff in December 2018.
The market upswing aligned with strong employment numbers, global trade progress and positive corporate fundamentals. In short, the economy is doing pretty well and companies are profitable and employing people in the U.S. So, what’s with all the negative headlines? What about all the trade tensions, political head-butting, impeachment activity and the general global economic slowdown?
Trade War Continued
On the trade front, the Trump Administration imposed tariffs on over $100 billion of Chinese goods with additional tariffs enforced on Mexico, Europe and India. The administration has also threatened to impose tariffs on an additional $150 billion of Chinese goods if an agreement is not reached.
While the market responded negatively shortly following the announcement of these tariffs, it has since recovered. In December, Trump claimed the U.S. and China are moving forward with “Phase One” of a trade deal sending stocks higher to close out the year. The agreement, expected to be signed on January 15, calls for an increase in U.S. exports to China and a pullback on U.S.-imposed tariffs on Chinese goods, among other things. The House also approved the US-Mexico-Canada Agreement (USMCA), replacing NAFTA, and investors responded positively.
Impeachment Progressed
In December, the House of Representatives voted to impeach President Trump over abuse of power and obstruction of Congress following the President’s dealings with Ukraine. His fate now rests in the hands of the Republican-controlled Senate. House Speaker Nancy Pelosi said she is waiting for agreement on a fair process before transmitting the articles of impeachment to the Senate.
Because Republicans hold a majority in the Senate, it’s unlikely articles of impeachment will pass. The impeachment process, however, will have an impact on Trump’s re-election campaign in 2020. Markets responded well to ongoing impeachment news in 2019, but progress this year may have a different effect.
Interest Rates Cut
In the face of a slowing global economy, the Federal Reserve (Fed) cut interest rates three times in 2019. The idea is that lower interest rates will free up money in the system to catalyze growth. It appears to have helped during the year, however, rates are near historic lows, and the concern is that the Fed may run out of options if the recent rate cuts don’t lead to expansion. We’ve already seen this happen in developed countries with negative interest rates including Japan, Switzerland and Sweden.
During the year, and as a result of rate cuts, consumer sentiment rose along with the U.S. dollar. Additionally, fixed income markets went up with the equities markets and returned nearly 9% in 2019, as measured by the Bloomberg Barclays U.S. Aggregate Index. Bond prices have a negative correlation with interest rates. Like a seesaw, when interest rates go down, bond prices go up, and vice-versa. So, the concern with historically-low interest rates is, if rates go up (which they likely will in coming years) how can you safely invest in bonds knowing that bond values will drop as a result? Since bonds are conservative and the primary “ballast” within a portfolio, it’s important to diversify bond holdings and potentially consider alternatives to balance out your portfolio in a rising interest rate environment.
Outside the U.S.
In Europe
In the United Kingdom, Boris Johnson replaced Theresa May as Prime Minister. In December, the Conservative Party secured resounding majority over the Labour Party in the general election. The win assisted Johnson’s push for the UK to leave the European Union ahead of the January 31 Brexit date. UK inflation fell slightly during the year and remained below the Bank of England’s target. Similarly, Eurozone annual inflation remained below the ECB’s 2% target. The outcome with Brexit could have a big impact on these major economic indicators and European markets, alike.
In Asia
The Chinese stock market returned over 20% in 2019 after experiencing its worst year in over a decade in 2018. The Chinese Official Manufacturing PMI, an important indicator of expansion in Asia, beat expectations during the year. The Bank of Japan held interest rates steady in 2019 and hinted at continued stimulus if expansion does not turn around this year.
In Emerging Markets
Emerging market stocks grew in 2019 despite ongoing trade tensions. In Saudi Arabia, Saudi Aramco’s initial public offering (IPO) marked the world’s largest share offering months after the company suffered a drone attack which forced the kingdom to shut down half of its oil production. In Hong Kong, protests continued after a prominent victory by the pro-democracy movement in local elections in November. President Trump’s ratification of two bills in support of the movement was applauded by protestors and detested by the Chinese government. Meanwhile, in Mexico, President Andrés Manuel López Obrador took office in December. In India, Narendra Modi handily won re-election for another five-year term as Prime Minister, buoying market sentiment.
What does 2020 have in store?
In the U.S., the ongoing impeachment activity of President Trump is a wild card for the stock market. Who would’ve thought? In addition, this election year could also pose uncertainty. Historically, election years tend to welcome more volatility in the market, but contrary to popular belief, they do not usually lead to down markets. Global trade could also have a big impact on markets, and progress with the U.S. and China trade deal will set a precedent for negotiations to come. The U.S. bull market is now entering its eleventh year. Historically, these market upswings tend to last eight years, so some investors argue that a correction is long overdue, however, fundamentals may prove otherwise.
Easier monetary policy in the U.S. and globally may continue to prop markets up in 2020. That being said, a low interest rate environment could pose a threat to conservative investors in fixed income, so diversification is paramount. If you’re an aggressive investor, it’s wise to look beyond the U.S. for undervalued equities. A balanced mix of U.S., international developed and emerging market stocks may benefit you in a world becoming smaller through global trade and evermore economic connectivity.
Moral of the story: build an appropriate, diversified asset allocation (mix of stocks and bonds) in your portfolio, and stick with it for the long term - even in the face of a potential rollercoaster ride of a market.
Do you need to take an in-depth look at your portfolio to start the new year? Reach out to me at Ben@coveplanning.com or schedule a free consultation call.
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Ben Smith is a fee-only financial advisor and CERTIFIED FINANCIAL PLANNER™ (CFP®) Professional with offices in Milwaukee, WI, Evanston, IL and Minneapolis, MN, serving clients virtually across the country. Cove Financial Planning provides comprehensive financial planning and investment management services to individuals and families, regardless of location, with a focus on Socially Responsible Investing (SRI).
Ben acts as a fiduciary for his clients. He does not sell financial products or take commissions. Simply put, he sits on your side of the table and always works in your best interest. Learn more how we can help you Do Well While Doing Good!
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Ben Smith, and all rights are reserved. Read the full Disclaimer.