2019 Review: A Look Back At the Comeback
I trust everyone had a wonderful holiday season. In Nashville, we are looking forward to a potential Titans run at the Super Bowl, as improbable as that might seem. Who thought they would make it this far anyway? A 2019 review would likely conclude that they have certainly surpassed many of the goals they set forth last year.
Whether you reached your own personal goals last year, faced challenges, or are looking for a 2020 reboot, a new year and a new decade bring challenges and opportunities.
This month, I want to review the year that just ended and take a peek at the upcoming year, as well as introduce readers to our new format newsletter.
Before we jump into a review of 2019, let’s touch on the events that led up to last year’s impressive market run.
As some of you might remember, as 2018 came to a close, stocks were in the midst of a steep sell-off, which shaved nearly 20% off the S&P 500 index over a three-month period. At the time, the Fed was in the process of gradually increasing the fed funds rate in quarter-point increments. In addition, the Fed was allowing bonds purchased during its bond buys (popularly called QE or quantitative easing) earlier in the decade to run off its balance sheet.
The rate hikes, which began in late 2015, did little to deter bullish enthusiasm, however. That is, until October 2018 when investors began to fret that the Fed might be on the verge of a policy mistake that could tip the U.S. economy into a recession. Mix in rising trade tensions with China and a steep and unsettling correction ensued. It rivaled the sell-off in 2011, which was tied to recession fears and a widening eurozone debt crisis.
A loss of just seven more points on the S&P 500 Index would have officially ended the bull market, which began in 2009. As it turns out, the bull market continued!!
As we look back at a 2019 review, trade headlines and Fed policy had the biggest influences on sentiment. Throughout the year, market action marched to the beat of trade. Positive trade headlines generated enthusiasm and tensions created pullbacks.
Zoom in on May and August, and rising tensions forced the bulls to the sidelines. Still, the broad-based S&P 500 Index lost less than 7% during each of the pullbacks – modest declines by historical standards. In my view, a more flexible Fed and continued economic growth cushioned the downside.
Speaking of the Fed, let’s drill down on the shift in policy at the central bank that drove markets to all-time highs.
The Fed quickly altered its stance in January, going on hold as it abandoned its focus on increasing the fed funds rate. By the end of the year, the Fed had cut rates three times – a sharp contrast to beginning of year expectations of two more rate HIKES. We began the year with a fed funds rate of 2.25%-2.50% and ended the year with a rate of 1.50%-1.75%. Undoubtably, it was a dramatic about-face that was dictated by a changing economic environment.
Additionally, the Fed stopped shrinking its balance sheet. By year end, the Fed was back in the open market purchasing shorter term bonds and T-bills, at least temporarily. While it refuses to use the term “QE,” for it’s activity during the year, in effect, it’s employing a similar policy to what it used earlier in the decade. As if celebrating the end of year ball drop, in December, Fed Chief Jerome Powell hinted that he is in no hurry to take back any of the rate cuts in 2020. Happy New Year!!!
Longevity—one for the record books
The current economic expansion began in July 2009, according to the National Bureau of Economic Research (NBER), the official arbiter of recessions and expansions.
Ten years later, the economic expansion entered the record books, surpassing the long-running expansion of the 1990s. Following the financial crisis and Great Recession, few thought the expansion would last this long. Few thought we’d ever see the jobless rate fall below 4% again. Once again, the U.S. economy has been surprisingly resilient – thanks to the US consumer – as business spending and trade stalled due to trade tariffs and CEO caution over what to make of the trade war.
That leads us to the next question, and one of a shorter term nature. Might a recession be lurking in 2020? A Conference Board survey of CEOs and top-level executives noted, “For U.S. CEOs, a recession rose from being their third biggest concern in 2019 to their top one in 2020.”
Global growth slowed last year, and activity in the U.S. manufacturing sector has been soft. In fact, the ISM Manufacturing Index has been horrible. A recession is inevitable, but is 2020 the year?
Economists haven’t done a very good job of forecasting recessions, but conditions that generally lead to a recession aren’t in place today. These include:
- Rising interest rates and rising inflation.
- A credit squeeze that cuts off lending to businesses and consumers.
- Asset bubbles. Stocks aren’t cheap, which make them vulnerable to unexpected events, but valuations (P/E ratios) are nowhere near levels seen in 2000.
- Oil supply shock.
In addition, the long-running expansion has been subpar. That means we haven’t seen the excesses and imbalances that breed too much euphoria and excess spending. That is, unless we look at student loans, where it looks like there is an epidemic. It’s no wonder the debt forgiveness proposals by some Democratic Presidential candidates look appealing to many.
However, while manufacturing has been soft and the Conference Board’s Leading Index isn’t suggesting a near-term acceleration in growth, the broader-based service sector is expanding and consumer spending has been strong. Further, stock market action isn’t foreshadowing a near-term recession. At least for now, onward we go. Get your 2019 review and your 2020 in order – consider now to be the best time to set up a budget and financial plan.