In December 2018, the stock market threw a tantrum that came perilously close to ending the bull market, based on the most widely used definition: a 20% decline on S&P 500 Index closing prices. Stocks fell on a combination of global growth fears, trade uncertainty, and concerns that the Federal Reserve (Fed) had hiked interest rates one too many times. On December 24, 2018, the S&P 500 closed 19.8% below its September 20 closing price, coming within a fraction of a point of ending what has become the longest bull market ever.
In 2019, expanding valuations drove gains for stocks; in 2020, we expect earnings to do the heavy lifting. Better clarity on trade may help drive increased business spending and more productivity, which we think will lead to stronger earnings growth in 2020. We are encouraged by the additional clarity companies now have as a result of the trade pact reached with China December 13.
One of our biggest challenges in 2019 was explaining the bond market’s baffling signals. Many firms— including ours—kicked off 2019 with expectations of rising rates after the Federal Reserve’s (Fed) December 2018 rate hike.
Then, the macroeconomic environment made a turn. Trade tensions between the United States and China intensified, and global economic data deteriorated. Global fixed income investors turned to U.S. Treasuries for income, safety, and liquidity, adding more pressure on yields. The 10-year U.S. Treasury yield fell to a three-year low of 1.46% on September 4, and the Treasury yield curve inverted (long-term yields falling below short-term yields)
. As this happened, we emphasized in our communications that the bond market was becoming disconnected from U.S. economic fundamentals. Thankfully, the Fed eased tensions with three straight rate cuts from July to October. Policymakers’ actions seem to have renewed investors’ confidence.
The U.S. economy has made it out of a volatile year relatively unscathed, based on data we’ve seen. Gross domestic product (GDP) grew an average of 2.4% in the first three quarters of 2019, higher than the 2.3% average quarterly growth in this 10-year economic expansion [Figure 2]. Output growth was helped by strong consumer spending, an uptick in government spending, and improved housing demand. Businesses held onto their cash, capital expenditures (capex) growth stalled, and non-residential investment dragged on secondand third-quarter GDP.
Hindsight is 20/20, but finding clarity in future uncertainty can be fuzzy.
AT LPL RESEARCH, as we look forward to the year 2020 and a new decade, some key trends and market signals will be important to watch, including progress on U.S.-China trade discussions, an encouraging outlook from corporate America, and continued strength in consumer spending.
Trade risk, slower global growth, and the impeachment inquiry have garnered a lot of the headlines recently, but behind the scenes the U.S. economy has remained resilient. Economic data has been meeting lowered expectations, indicating an expansion that is still enduring. Most recently, third quarter economic growth was consistent with the long-term trend of this current economic expansion, which is now more than 10 years old.
We expect the U.S. economy to continue to grow in 2020 and support gains for stocks, although we are increasingly mindful of our position in the business cycle. At some point in the future, this record-long expansion will come to a close, leaving investors wondering what’s next. Against this backdrop, questions about the next potential recession and the 2020 U.S. presidential election continue to be top of mind for many investors. While we can’t see into the future, one thing we can predict is that uncertainty in the markets is here to stay. And we are here to help. We offer our Outlook 2020, your guide to preparing for this dynamic—and uncertain—market environment.
Read more about our forecasts and key themes in the full publication.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. The economic forecasts may not develop as predicted. Please read the full Outlook 2020: Bringing Markets Into Focus publication for additional description and disclosure. This research material has been prepared by LPL Financial LLC.
The S&P 500 Index is currently on pace for its best year since 2013, up more than 25%. However, technical analysis is based on the idea that a market in motion may stay in motion, and six of the last seven times the index gained more than 20%, the following year saw double-digit gains. Context is also important, so while year-to-date numbers might look large, the index has gained only 9% since the January 2018 peak. In addition, and in contrast to moves earlier in the year, more cyclical sectors have been leading the market higher, with financials, industrials, and technology the top-performing sectors over the past three months. Finally, seasonality also may be a tailwind, with the November through April period historically representing the best six-month period for stocks, on average.