2019 Economic Review

In this 2019 recap: U.S. stocks have a banner year, with help from a shift in Federal Reserve monetary policy, a slight thaw in the U.S-China trade dispute, and encouraging economic data.

The Year in Review, Presented by The Meridien Team

THE YEAR IN BRIEF

An old stock market adage says that stocks climb a “wall of worry” – that is, when the major indices move higher, they do so in spite of Wall Street’s ongoing anxieties and doubts. In 2019, that “wall of worry” was certainly overcome. After a 2018 retreat, the Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 all rose more than 20% last year. What encouraged such bullishness? A change in monetary policy at the Federal Reserve, a collection of encouraging and improving economic data, and some progress toward resolving the ongoing U.S.-China trade dispute. Foreign stocks also advanced. On the commodities front, gold had its best year in nearly a decade, and oil posted a large 2019 gain. Falling mortgage rates had little effect on home sales. 1

DOMESTIC ECONOMIC HEALTH

The U.S.-China trade disagreement was on the minds of traders all during 2019. Things heated up during spring and summer. In May, the White House announced that the U.S. would hike 10% tariffs to 25% on $250 billion of Chinese imports. After trade talks broke down, a new round of 10% tariffs were levied on an additional $300 billion of Chinese goods in August. China responded by devaluing its core currency, the yuan, to effectively offset the tariffs, and refraining from buying U.S. crops. During the 3 rd quarter, China and the U.S. announced further tariffs on each other’s goods. Then, there was progress: on December 13, officials from both countries said that they had agreed to a “phase-one” trade pact, through which the U.S. would postpone new tariffs planned for December and scale back others. In return, China pledged to buy more U.S. crops. The “phase-one” deal is scheduled to be signed this month and is viewed by both nations as the first step toward a larger-scale trade accord. 2,3

The other major economic story of 2019 was the Federal Reserve’s shift in monetary policy. After tightening the money supply in 2018, the Fed signaled the market in January that it was considering easing its stance. In the second half of 2019, Fed policymakers made three quarter-point cuts to the federal funds rate, to take its target range to 1.50%-1.75%. It also started buying short-term Treasuries again in October, an effort slated to continue into spring 2020. When 2018 ended, some investors were concerned that the Fed had raised short-term interest rates too soon, exerting a drag on the U.S. and the global economy. 4,5

Regarding American growth, the Bureau of Economic Analysis estimated the country’s gross domestic product (GDP) at 3.1% in the first quarter of 2019, 2.0% in Q2, and 2.1% in Q3. Consumer spending increased in ten of the first eleven months of the year, according to the BEA, February being the exception. Retail sales were up 3.3% across the year ending in November. 6,7

The two most-watched household confidence gauges did well in 2019. The Conference Board’s Consumer Confidence Index stayed above 120 all year, peaking at 135.8 in July; the University of Michigan’s Consumer Sentiment Index never went below 91, hitting an even 100 in May. 8,9

Had the economy reached peak employment? Economists were unsure. By December, unemployment had been under 4% for 21 straight months, yet hiring numbers were still strong: monthly job creation had averaged 205,000 for the past three months. The Department of Labor said the headline jobless rate was at a 50-year low when it reached 3.5% in November; the U-6 rate, which also counts the underemployed, was at 6.9%. Wages grew 3.1% across the year ending in November. 10

It was not a good year for U.S. manufacturing, at least by the measurement of the Purchasing Managers Index (PMI) for the factory sector, maintained by the Institute for Supply Management. When this index is below 50, it is taken as a sign of sector contraction. ISM’s factory PMI has been under 50 since August (it was at 47.2 in December). Across the first eleven months of 2019, ISM’s Non-Manufacturing PMI never went below 52.6, and it was at 53.9 in November. 11,12

President Donald Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act into law in December. Among other features, the SECURE Act raises the age for Required Minimum Distributions (RMDs) from traditional retirement accounts from 70½ to 72 (this new rule applies only to individuals who turn 70½ in 2020 or later). It also allows seniors with earned income to continue contributing to traditional retirement accounts after age 70½. 13

GLOBAL ECONOMIC HEALTH

Benchmark interest rates were cut around the world in 2019. The European Central Bank eased, as did central banks in India, Russia, South Africa, and Brazil. Like the Federal Reserve, the ECB began purchasing bonds again. What motivated all this? In the big picture, global commerce slowed. As an International Monetary Fund analysis points out, demand for durable goods weakened in the first half of the year, and that led manufacturers to reduce both output and business investment, which affected the gross domestic product (GDP) of various nations. 14  

According to The Economist, the global economy expanded by about 2.2% in 2019, representing the poorest annual growth in ten years. The eurozone’s GDP was just 1.7%. The U.S., Spain, Australia, Russia, France, Germany, Japan, and the United Kingdom all had a 2019 GDP of less than 2.5%. On the other hand, the economies of Indonesia, Vietnam, China, and India expanded between 5-10%. 15

The U.S.-China trade dispute aside, the other major story of the year was the ongoing saga of the Brexit, which was postponed until 2020. After much argument in Parliament and politicking by the Labour and Conservative parties, a general election was called for December; Prime Minister Boris Johnson and his fellow Conservatives won by a landslide. The Conservatives now have a majority in Parliament, and that bodes well for Johnson’s plan to have the U.K. make its Brexit from the European Union by January 31. Both the E.U. and the U.K. face a new challenge for 2020: finalizing a trade agreement by December 31. 16

WORLD MARKETS

Looking at foreign benchmarks, large year-over-year gains were conspicuous in 2019. Take the Asia-Pacific region, for example: Japan’s Nikkei 225 rose 18.20%; China’s Shanghai Composite, 22.30%; South Korea’s Kospi, 12.13 % ; India Nifty 50, 12.50%; Australia’s All Ordinaries, 19.01%; Hong Kong’s Seng, 10.53%. In South America, Brazil’s Bovespa Climbed 31.58%; Argentina’s Merval, 37.56% 17

As for Europe, the German DAX index gained 25.48%, France’s CAC 40 improved 27.77%, and Spain’s IBEX 35 added 12.43%. MSCI’s EAFE index, which provides a representative, big-picture view of the performance of developed stock markets outside North America, advanced 18.44%. 17,18

COMMODITIES MARKETS

What kind of year was 2019 for commodities? Crops aside, a good one. The S&P GSCI index, which is akin to the Dow Jones Industrial Average of the commodity sector, gained 17.6% and had its best year since 2007. 19

Some energy futures and metals made impressive advances. Crude oil, per the S&P GSCI, rose 34.1% for the year, a climb aided by the U.S. putting economic sanctions on Venezuela in the first quarter. WTI crude, the U.S. benchmark, ended 2019 at $61.19 a barrel on the New York Mercantile Exchange (NYMEX). Gold, which concluded 2019 at $1,520.20 an ounce on the NYMEX, had its best year since 2010, advancing 18.0%. That was nothing compared to palladium, which jumped 64.3%. Nickel rose 32.8% for 2019, and demand from China and supply concerns sent iron ore up 83.1%. 19,20

A notable 2019 loser in the commodity sector: natural gas. Futures fell 32.3% for the year. Wheat was the top-performing crop, adding 9.4% for its third consecutive yearly gain. In contrast, many crop and livestock futures had a down 2019: lean hog futures had it worst, falling 19.2%. 19

REAL ESTATE

Home loans grew less expensive as 2019 went on. When Freddie Mac conducted its first Primary Mortgage Market Survey of 2019 (January 3), the average interest rate on a 30-year, fixed-rate mortgage was 4.51%; the average interest rate on the 15-year, fixed-rate mortgage was 3.99%. Compare that with the results from Freddie’s December 26 PMMS, which showed mean interest rates of 3.74% for a 30-year loan and 3.19% for a 15-year loan. 21

Despite this development, there was no great surge in home buying during 2019. The National Association of Realtors’ most recent monthly home sales report is revealing. By November, residential resales were up 2.7% year-over-year, but the sales pace was the slowest in five months. Demand was not the problem: 45% of properties listed had sold within 30 days. The problems in the residential real estate market were the same ones common to 2018: thin inventory and appreciation outpacing wage gains. The NAR said that there was just 3.7 months of inventory listed for sale in November, down 7.3% from November 2018. The median sale price of an existing home was $271,300 in November, up 5.4% from a year earlier. The question now is whether this seller’s market will remain through 2020. 22,23    

Things were different on the new home front in 2019. The most recent report from the Census Bureau (November) shows new home buying up 16.9% year-over-year, even with the median sale price rising 7.2% to $330,800. The inventory of new homes measured 5.4 months, greater than that for existing homes. Housing starts were up 13.6% year-over-year in November, with the pace of building permits increasing to a level unseen since 2007. 24,25

QUOTE OF THE YEAR

Doubt , of whatever kind, can be ended by action   alone .”

THOMAS CARLYLE

LOOKING BACK, LOOKING FORWARD

The decade ended positively on Wall Street, with the major equity indices making strides. The Nasdaq Composite and the S&P 500 had their best year since 2013. The 2010s were a decade with a pronounced upside for the market: including dividends, the S&P 500 returned approximately 257% between the start of 2010 and the end of 2019. 1

MARKET INDEX 2019 2018 2017 2016
DJIA +22.34 -5.63 +25.08 +13.42
NASDAQ +35.23 -3.88 +28.24 +7.50
S&P 500 +28.88 -6.24 +19.42 +9.54
         
BOND YIELD 12/31 RATE 1 YR AGO 5 YRS AGO 10 YRS AGO
10-YR TREASURY 1.92 2.69 2.17 3.85

Sources: barchart.com, 1stock1.com, treasury.gov – 12/31/19 26,27,28

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.

Could 2020 also turn out to be a great year for stocks? A recovery in earnings and a recovery in U.S. and global manufacturing could help to drive the market further north. On the other hand, tensions are building in the Middle East, which is a concern to market observers. Whether 2020 brings advances for Wall Street benchmarks or not, investors are entering the Twenties with much of the confidence they harbored in 2019.

The Meridien Team may be reached at 866-871-9963 or meridienteam@pensionmark.com

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Pensionmark® Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940. Pensionmark® is affiliated through common ownership with Pensionmark Securities, LLC (member SIPC).

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The Korea Composite Stock Price Index or KOSPI is the major stock market index of South Korea, representing all common stocks traded on the Korea Exchange. The NIFTY 50 index is National Stock Exchange of India’s benchmark broad based stock market index for the Indian equity market. It represents the weighted average of 50 Indian company stocks in 12 sectors and is one of the two main stock indices used in India. The All Ordinaries (XAO) is considered a total market barometer for the Australian stock market and contains the 500 largest ASX-listed companies by way of market capitalization. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The MERVAL Index (MERcado de VALores, literally Stock Exchange) is the most important index of the Buenos Aires Stock Exchange. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The IBEX 35 is the benchmark stock market index of the Bolsa de Madrid, Spain’s principal stock exchange. The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indices from Europe, Australia, and Southeast Asia. The S&P GSCI is a composite index of commodities that measures the performance of the commodity market. The S&P GSCI is the commodity equivalent of stock indexes, such as the S&P 500 and the Dow Jones. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.  

CITATIONS:
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