Year in Review: 2019
Markets had an excellent year in 2019 due in large part to the change in the Federal Reserve’s (“The Fed”) stance on interest rates. The Fed had been increasing interest rates during 2017 and 2018. Then during 2019 reversed course cutting interest rates three times and expanded its balance sheet at the fastest pace since the 2008 Global Financial Crisis. This liquidity injection, along with the prospect of the Phase One Trade Deal with China, fueled last year’s stock market boom. Corporate profit growth was very anemic and provided little help. The Fed has taken a very dovish stance and indicated that interest rates increases, which would eventually be negative for the stock market, are currently off the table.
Market Outlook: 2020
The difference from last year is that equity valuations are at the high end of their traditional range, reflective of the current level of interest rates and investor’s expectations of accelerating corporate profit growth. With the 2020 election less than 10 months away, politics will be a mainstay in the headlines this year and we expect polling data trends to impact market volatility. President Trump will do what he can this year to keep the economy growing, giving him a better chance at re-election. The Fed is expected to hold interest rates steady through the election.
As we look to 2020, markets are expecting corporate profit growth to accelerate from the slower growth we experienced in 2019. This expectation is due to the finalization of the first phase of a trade deal with China and implementation of the new trade agreement with Mexico and Canada. The yield curve has steepened which also indicates that bond investors share this enthusiasm.
The two biggest enemies to any bull market are higher oil prices and higher interest rates. Geo-political events tend to have only a short-term impact on markets. Current levels in credit markets, sentiment, valuations, the election cycle, and other factors suggest positive but below average returns for equities in 2020. To be more positive, investors would need to see more rapid corporate profit growth, lower interest rates, more election certainty, and/or a Phase 2 trade deal with China. A decline in equities could be caused by polls showing strength in the more liberal Democratic election candidates, an increase in oil prices or interest rates, or more trade tensions. We must keep in mind that we are in the eleventh year of an economic recovery, the longest recovery since World War II and that the unemployment rate is very low at 3.5%. There remains a possibility of a recession, though the odds of that were lowered by the Fed’s current stance on interest rates.
We look forward to working with you in the coming year and commit to always act in your best interest and strive to earn the trust and confidence you have placed in us. Please feel free to call or email us with any questions. Happy New Year!