Equity Overview

Stocks had a remarkable year in 2019, rebounding from a disappointing 2018.  All the major indices rose by more than 20%.  The S&P 500 posted its best performance since 2013 and its second best performance since 1999.

Many global markets also rose sharply, with European stocks up 23%, China up 22%, and Japan up 18%.

Notwithstanding the strong stock price gains, aggregate earnings for the S&P 500 did not keep pace, rising less than 1% in 2019.  The forward price/earnings ratio for the S&P 500 was 18.2x at year’s end, above the 5-year average of 16.7x and suggesting a market which may be overheated.  However, analyst consensus estimates project a 10% gain in corporate earnings in 2020 which, if accurate, would ease some of that concern.

Macro Overview

The markets climbed the proverbial “wall of worry” in 2019, rising dramatically in spite of a series of significant challenges.  The year started with widespread fear that a recession might be imminent, a fear that was reinforced at mid-year when the yield curve inverted (a usually reliable predictor of a coming recession).  However, the yield curve returned to normal and the economy continued to grow, albeit modestly.  In the end, there was no recession.  In fact there was no recession at any point in the 2010s, the first decade with no recession since record keeping began in the 1850s.

The trade war between the U.S. and China also posed serious headwinds, as both countries imposed tariffs and counter tariffs on hundreds of billions of dollars of imports.  Numerous sectors of the economy were affected, with agriculture sustaining the greatest impact.  But by year’s end the parties reached a so-called Phase 1 agreement which provided psychological relief to the markets (although its actual significance is the subject of debate).

Other international events also threatened markets—including instability across the Middle East, confrontation with Iran, continued nuclearization in North Korea, Brexit in Great Britain—but none had a lasting impact on stock performance.

The impeachment of the president by the House of Representatives might have been a meaningful event in another era.  However, perhaps because conviction by the Republican-controlled Senate appears impossible, there has been no measurable market impact.

And two important factors helped markets retain momentum in 2019.

The first was the Federal Reserve, which had raised interest rates in 2018 but reversed direction and lowered rates three times in 2019 at key moments when it appeared that the economy might falter.

The second was the economy itself, which showed surprising resilience.  Manufacturing was generally weak and got weaker as the year progressed.  But job growth was steady and the unemployment rate dropped to a near 50-year low of 3.5%.  This contributed to heightened consumer confidence and to strong consumer spending, which represents about 65% of GDP.

Source:  Factset Research Systems