What a month, what a quarter, what a year! The markets capped off the end of the decade in epic fashion. The S&P 500 TR returned 3.02% during the month, 9.07% for the fourth quarter and 31.49% for the 2019 calendar year. The 2019 calendar year represents the second highest calendar return of the decade, the only better year was the 32.39% return in 2013. The small-cap and mid-cap markets trailed the large cap markets, but still performed well. The S&P Mid-Cap 400 returned 7.06% during the fourth quarter and 22.78% for 2019, while the S&P Small-Cap 600 returned 8.21% for the quarter and 26.20% during 2019. On the international equity side, emerging markets had a strong finish to the year. The MSCI EM index returned 7.46% during December, 11.84% during the fourth quarter and 18.42% for 2019. The developed international markets, represented by the MSCI EAFE NR, returned 22.01% for the year.

The yield curve steepened slightly during the month as short-term rates fell slightly and long-term rates rose slightly. High-quality intermediate-term bond returns were slightly negative for the month while low quality, high-yield bond returns were strong in December. The Barclays US Corporate High Yield Index returned 2.00% in December and 14.32% for the year.

The markets were driven by an uptick in economic news. The Fed’s three rate cuts during 2019 seemed to have brought some stability to the economy and helped the markets. The Fed’s actions have especially helped the housing market which benefit from lower interest rates. U.S. home building surged in November and permits for future home construction surged to a 12 ½ year high. Housing starts rose 3.2% and single-family construction hit a 10-month high. Builder confidence in the new, single-family home market hit its highest level in 20 years. In addition to the low rates, home builders are benefiting from the low supply of existing homes for sale.

The government announced the U.S. economy grew a pace of 2.1% for the third quarter which was generally in line with expectations. U.S. manufacturing saw a rebound, benefiting from auto production following the end to an almost six-week strike at a General Motors plant. The unemployment rate remains low and wages continue to rise, both factors will help consumers and thereby help the economy.

The U.S. and China trade war cooled in December as it was reported that both sides agreed in terms to a Phase 1 trade deal. Nothing is official and the terms appear murky at this point. The U.S. suspended the planned 15% tariffs that were scheduled to go into effect in December and China cancelled its retaliatory tariffs, which included a 25% tariff on U.S.-made autos, the same day. The U.S. also cut, by half, the tariff rate it imposed in September on some Chinese goods. The U.S. reported that the Chinese agreed to increase purchases of American products and services over the next two years, nearly doubling U.S. exports to China, with higher purchases in later years expected. There are still more details being hashed out including segments involving intellectual property, currency, resolution of disputes and access to Chinese financial services. It is a positive that the threat of the trade war escalating has subsided and the current expectation is for the Phase 1 deal to be signed on January 15.

Assuming European lawmakers green light the Withdrawal Agreement, the U.K. will officially leave the EU on January 31. Nothing will change in the short-term, but both the EU and U.K. will meet several times during the year to come to an agreement on their future relationship. Talks are expected to begin in February and an EU U.K. summit is expected in June. If no extensions are needed and a new deal is agreed upon, a new agreement could be set to go into force December 31, 2020. This is a short amount of time to go through all the details, and we have seen many delays in the past, but this is the outline for the Brexit in 2020.

The last twelve months have been very good for investors and with lower interest rates, improving economic readings and easing tensions with China it is natural for investors to be optimistic about future returns in the market. While the risks of a recession in 2020 have declined, higher company valuations, U.S. Presidential election, the post-phase 1 trade negotiations and the risk of rising inflation are some of the concerns that could bring some volatility into the markets in 2020.

We wish all of our clients and readers a Happy and Prosperous New Year.

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