After a year that involved the largest U-turn in recent Fed monetary policy history, central banks are now hoping for a more stable agenda in 2020. The Fed’s shift from a hawkish restrictive stance to a dovish easing one, combined with news of additional monetary stimulus in Europe, expected fiscal stimulus in Germany and Japan, and a “Phase One” trade deal with China, has almost entirely changed the expectations for global economic growth.
Investors began 2020 increasingly confident with a new risk-on mode despite a short-lived setback in stock prices, a spike in oil related to rising U.S./Iran tensions, and evidence of a more mature investment cycle. In the fourth quarter, U.S. shares marched higher, earning almost 9 percent, although international market equities weren’t far behind as they finally accelerated, gaining nearly 8%. Emerging market equities shined the brightest, outpacing their developed-market counterparts for the final quarter of 2019 with earnings of 11%. In fixed income, the broad Bloomberg Barclays Aggregate Bond Index was mostly unchanged.
U.S. manufacturing continued to slide further into a decline throughout the fourth quarter ending the year at the lowest level of activity in a decade. The services sector countered, increasing its growth pace to finish 2019 at moderately healthy levels. The unemployment rate fell to 3.5% during the quarter, the lowest rate in 50 years.
Along with the U.S./China “phase-one” trade agreement in December, the administration finally secured bipartisan support in the House of Representatives for the U.S.-Mexico-Canada Agreement (USMCA) to replace the North American Free Trade Agreement (NAFTA). This additional win for the administration came in just as the House approved articles of impeachment.
Also in December, as a part of the government’s spending bill, Congress passed the most comprehensive changes to the U.S. retirement system in more than a decade. The ‘Setting Every Community Up for Retirement Enhancement’ SECURE Act became effective January 1, 2020. Important changes in the new law, affecting most all our clients, include a later Required Minimum Distribution (RMD) age of 72, no more age caps for making IRA contributions, and many other important provisions.
Moreover, the Federal Open Market Committee (FOMC) cut the federal-funds rate by ¼ point (0.25%) in October, its third cut in as many meetings. In mid-October, the U.S. central bank also made its first monthly purchase of $60 billion in Treasury bills as part of a program to increase liquidity in the financial system. The bottom line, the Fed has completely shifted to a more supportive stance and is unlikely to take any additional actions between now and the election.
Looking forward, the impact of a dovish policy during a time of full employment could eventually lead to the kind of financial excesses or irrational exuberance that triggers bear markets. Some economists believe if we have another accelerating year for equities in 2020, it would be a source of concern for irrational exuberance rather than celebration.
Meanwhile overseas emerging market economies should further stabilize and improve markets, in part to a weaker U.S. currency. The single biggest factor in this sentiment reversal was the improved prospects for a U.S./China trade deal, albeit one that is a bit light on substance. Unfortunately growing concerns over potential economic damage from the fast-spreading coronavirus is providing new challenges.
We’re only weeks away from early primaries and caucuses that will begin to shape the November contest. Presidential politics can also roil equity markets in the U.S. and elsewhere when the unexpected occurs. Soon there will be more clarity regarding which Democratic nominee will face Donald Trump and we’ll better understand the landscape.
The rebound in 2019 has likely put 2020 on a more precarious footing as valuations and sentiment levels look a bit stretched. Markets will continue to focus on global cyclical concerns, trade, politics, geopolitics, valuations, and presidential tweets as we go into 2020. Although the ever-present ‘late cycle’ market risks have diminished somewhat, we still sense stocks are seeking a near-term correction or consolidation phase and we’re prepared to stay agile with investment decisions.
Until our technical analysis suggests otherwise, the expansion is poised to continue and models remain fully invested. While a normal pullback could materialize at any time, the bigger picture is that investors are likely to be rewarded for maintaining exposure to risk assets, and we will continue to maintain a flexible approach to dynamic asset allocation models.
With a new year upon us, this is an opportune time to review retirement law changes in the SECURE Act with your unique circumstances, and whether the asset allocation we currently have in place continues to be suitable. Please contact us anytime to discuss before your next meeting. We look forward to seeing you soon, wishing health and happiness in the New Year ahead.
Eric W. Kendrick, CFP