Here’s a statement that may surprise you: 2019 was a great year to be invested in the markets. It’s understandable if you are scratching your head. The noisiest pundits had investors worried about slow growth and recession. President Trump’s reignition of a trade war with China certainly didn’t help. Thankfully, the markets ignored all the doom and gloom scenarios playing out in the media and rebounded from a tough 2018. According to Forbes, the Dow 30 Industrials increased 22%, the S&P 500 was up 29% and the NASDAQ jumped 35% in 2019.1
So how did we get here?
A stay on raising interest rates
It certainly helped that we started 2019 with a low bar. According to CNBC, the last quarter in 2018 saw the S&P 500 drop 13.97%, the Dow 11.8% and the Nasdaq plunge 17.5%.2 The U.S. Federal Reserve was planning to raise interest rates. The China-U.S. trade talks were going nowhere. We entered January and all of a sudden things changed and changed fast. In the first week of the new year, the Federal Reserve reversed its stand on interest rates and announced any increases would be on hold for the foreseeable future. Combined with the fact that there is low to no inflationary pressure, this immediately gave the market a boost and allowed investors to think about being a little more aggressive. That’s certainly the approach I took.
Healthy corporate earnings
The expectations for the first quarter of 2019 were low after a particularly volatile 2018 and investors were nervous. They shouldn’t have been. Earnings were better than anticipated and stayed stable throughout the year. For the most, investors who had lost money in the last quarter of 2018 made it back and more between January and April 2019.
It’s all about trade and tariffs
With the exception of the month of May – the worst month of the year for investors – markets climbed throughout 2019. This is largely the result of mostly positive trade talks between the U.S. and China. It should surprise no one that May’s market slide was the result of renewed tariff threats from President Trump. The theme was clear: any talk of imposing tariffs caused the markets to drop; any talk of lifting tariffs caused them to rise. In December, after a year of exchanging punitive tariffs, the U.S. and China agreed in principle to phase one of a trade deal that would see the U.S. reduce existing tariffs and suspend new tariffs set to take effect a week before Christmas in exchange for China purchasing U.S. products. This is all good news. If a deal had not been achieved, no matter how strong the U.S. economy – and it has been strong – it would falter.3
The United States-Mexico-Canada Agreement largely good to go
December proved to be a big month for getting trade deals done. Just a week before the U.S.-China trade truce, congressional democrats in the U.S. tweaked and signed off on a new USMCA.4 All that’s left is for all three countries to ratify the new agreement. It’s not just China, Mexico and Canada, the U.S. has negotiated trade deals with Japan, Europe and it’s looking to do the same with the UK, now that it is definitely moving ahead with Brexit. Having trade deals in place creates a sense of stability and calm in the markets.
Let’s talk about the economy: it’s strong
Throughout the year, recession was put forth as a real, even likely possibility. For the most part here in Canada and definitely in the U.S., unemployment rates are low. In Canada, it sits at about 5.9%5 and in the U.S. it’s 3.5%.6 In Canada, in November, we lost 71,200 jobs.7 In the U.S., however, the economy added 266,000 jobs.8 It’s amazing. At some point that will slow. But not now. Low interest rates, non-existent inflation, an increasing minimum wage and healthy consumer spending are all good for the economy and great for investors.
Disappointing performance from Unicorn IPOs
We saw a number of large, privately held companies go public. Among them: Uber, Lyft, Pinterest and Beyond Meat – all companies that are shaping the way we live. In almost every case, the stock did not live up to the hype that preceded the initial public offering. The exception was Beyond Meat, which had investors excited about its promise as the plant-based future of protein. Its stock price quickly rose and just as quickly fell. I think people started to look at the valuations of these companies and realized while the topline growth was evident, the bottom line wasn’t. They are still spending more than they’re making and operating at a loss. The market has refused to pay for future potential – at least not yet. What does this mean for markets? Not much long term. Initially, when big names offer themselves up for investment, all the attention and a lot of money go their way. Then they have to prove themselves.
Slump for cannabis stocks
While legalization led to great excitement about cannabis stocks, one year later stock valuations have fallen. That may change with the opening of more legal marijuana shops and the coming of drinks and foods made with cannabis in Canada.9
Impeachment
If, politically at least, 2018 was defined by the Mueller Report in the U.S., in 2019 it was all about impeachment. Even though Congress is moving forward with two articles of impeachment against President Trump, the decision to impeach rests with the Republican controlled Senate. With partisanship the order of the day, impeachment simply won’t happen. The markets understand this and so have largely ignored the proceedings.
Tech stocks remain the strength of the market
Tech stocks are still a dominant force and represent where are all the growth is today. They are the biggest and fastest growing sector on the S&P 500, with companies such as Apple, Google and Facebook having another great year in 2019.
What about oil?
OPEC and Saudi Arabia cut production in order to drive up the cost of oil, which, as of December 2019, was sitting at about $60 per barrel.10 The tactic wasn’t surprising given that Saudi Arabia also announced an IPO for its incredibly rich national petroleum and natural gas company Saudi Aramco and wanted to drive up the price of its stock. It worked, Saudi Aramco, became the first public company to achieve $2 trillion valuation.11 That said, with the rise of alternative energies, low oil prices are the new norm.
The last word on 2019: If you look at where your portfolio was January 1, 2019 and where it is today, you will be nicely surprised at how much your investments grew. Enjoy it!
Call Me or Email Me
My approach to investing is straightforward. I study the markets, global economies and what’s happening within industries to be in a position to best help my clients find good quality investments that will help them meet their goals. I build custom portfolios for each client. I welcome you to call me at 416-332-3863 or email me at allan@allansmall.com.
References
- The Stock Market Needs Earnings Growth To Rise In 2020, Forbes
- US stocks post worst year in a decade as the S&P 500 falls more than 6% in 2018, CNBC
- Trump is bragging about his trade truce with China. But it’s unclear what he won., Vox
- House approves USMCA trade deal after more than a year of talks, sending it to Senate, CNBC
- Canada Unemployment Rate, Trading Economics
- United States Unemployment Rate, Trading Economics
- Canada Unemployment Rate, Trading Economics
- U.S. Added 266,000 Jobs in November. Here’s the Bottom Line., The New York Times
- Cannabis Stocks: Revisiting Their Valuations in November, Market Realist
- Crude Oil WTI (NYM $/bbl) Front Month, Market Watch
- Saudi Aramco becomes the first-ever public company to achieve a $2 trillion valuation, Markets Insider