December Market Overview
Investors enjoyed strong returns in December with most equity indices up several percentage points, including the S&P 500 which rose 3%. We attribute the rally to the continued progress toward a “phase one” trade agreement with China and broader economic strength.
Most fixed income indices were modestly positive as short-term rates declined slightly in the month, while longer-term rates rose slightly.
The bigger story, however, is the remarkable rally for the year: most equity indices were up over 20%, including the S&P 500, which rose 31.5% in spite of some challenging macroeconomic trends and geopolitical dynamics. The rally is a reflection on the robust U.S. economy, led by strong consumer spending which is being driven by accelerating wage growth and historically low unemployment levels (3.5%). Markets were further supported by an easing monetary policy (lower interest rates) throughout the year and the prospect for a partial, “phase one,” trade deal between the U.S. and China in the fourth quarter.
The uncertainty associated with the U.S.-China trade war was a significant challenge for businesses in 2019—one that hampered corporate investment and reduced U.S. growth by approximately 0.40%, according to estimates from Goldman Sachs. In an effort to stimulate corporate spending, the Federal Reserve reduced interest rates by a total of 0.75% over the course of the year, a complete reversal of the Fed’s prior communications which initially called for continued rate hikes throughout 2019. Lower interest rates were not enough to stimulate manufacturing activity, however, with the ISM manufacturing index declining throughout the year and into contractionary territory for the past five months. While this is clearly not a positive signal, it is important to note that the U.S. is a service-led economy, with manufacturing accounting for a much lower percentage of GDP.
Looking forward, we see many positives for the U.S. and global economies. Still, we are mindful of market expectations and believe significant optimism is currently “priced in” to the stock market—thus continued economic strength won’t necessarily translate to strong equity market returns.
One of the most significant positives for the U.S. and global economies is the prospect for the “phase one” trade deal between the U.S. and China—expected to be signed on January 15th. Uncertainty surrounding trade policy curtailed corporate investment throughout 2019, and we believe there may be potential for some pent up demand to bolster global growth this year.
Elsewhere, we are encouraged that there is now greater visibility into an orderly Brexit. If this comes to fruition, markets will avert a significant shock that likely would have driven a period of increased volatility.
In our view, the most foreseeable source of volatility in the year ahead relates to developments surrounding the U.S. elections and speculation on how policy will evolve. For instance, some Democrats advocate for a partial reversal of President Trump’s corporate tax cuts, which would reduce earnings and likely pressure stock prices. Investors will be looking to polls and ultimately the outcome of the elections to predict the likelihood of these types of proposals ultimately being signed into law.
While we believe it is important to monitor economic and geopolitical data points, our investment approach will remain pragmatic and objective with an emphasis on quality holdings and long-term performance.
Wishing you all a happy and prosperous New Year!
The monthly Market Overview is written by two members of MACRO’s Investment Committee: Mark Cortazzo, CFP®, CIMA®, and Christopher Moffett, CFA.
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