Fed Policy Turnaround, Phase One Trade Deal Changed Stock Market Landscape in 2019

The major U.S. stock indexes finished higher in the final week of 2019, with the big three hitting fresh record highs. Volatility remained relatively low, which led some to predict a big break was coming, but without any major economic releases or negative events last week, the markets continued their climb into year-end.

In the cash market last week, the benchmark S&P 500 Index settled at 3240.00, up 0.60%. For the year, it is up 29.2%. The blue chip Dow Jones Industrial Average finished at 28646.00, up 0.70%. It’s up 22.8% in 2019. The technology-based NASDAQ Composite closed at 9007.00, up 0.90%. It has gained 35.7% this year.

According to Bloomberg, “The S&P 500 Index is on track to match the 2013 29.6% return, which was the best of this decade. Historically, stocks have risen by an average of 7.0% the following year when the stock market rose by more than 25%, indicating that good returns don’t have to be followed by bad one.”

Two Key Factors Behind 2019 Gains

Helping U.S. investors get over the wall of worry in 2019 and allow the markets to finish the year and the decade at record highs were the Federal Reserve direction swing and a positive outcome to the U.S.-China trade negotiations.

Before taking a look at these two factors, Angelo Kourkafas from Edward Jones, has compiled a list of highlights (good and bad) of 2019, worth taking a gander at.

A year with plenty of records, firsts and low points

• 34 new record highs
• 126 months of economic expansion
• Unemployment at a 50-year low
• Zero 10% corrections
• Slowest global growth in 10 years
• Record low 30-year government yields
• $11 trillion of negative-yielding debt
• Yield-curve scare
• Asset-class scorecard

Dovish Pivot of Major Central Banks

Perhaps the biggest turning point in the financial markets in 2019 was the dovish turnaround by the major central banks around the world. The U.S. Federal Reserve, the European Central Bank (ECB) and the Bank of japan all became more accommodative to sustain economic expansions. Meanwhile the Reserve Bank of Australia and the Reserve Bank of New Zealand lowered their benchmark rates to record levels in order to stave off recessions.

The big change in the macroeconomic landscape contributed to the fall in short- and long-term interest rates, benefiting equities.

After witnessing a plunge in equity prices in late 2018 on concerns the Fed was tightening too fast amid an escalation in trade tensions and slowing global growth, central bank policymakers pivoted in March and starting in July, cut interest rates three times as insurance against risks to the outlook.

Trade War Escalation Then Truce

The trade war between the United States and China escalated throughout the year with both sides announcing retaliatory tariffs in May and August that led to the year’s steepest declines.

The trade war pressured global trade volumes, however, the most negative influence was on business confidence and investment.

Reaching a so-called Phase One trade deal in mid-December helped ease fears of further trade escalation, helping to drive up investor demand for risky assets.