It was a little more than one year ago that stocks were in the midst of a steep sell-off, which shaved nearly 20% off the S&P 500 index over a three-month period. In fact, we experienced the worst Christmas Eve trading day in the history of our market.
At the same time, the Fed was focused on raising interest rates and continuing the policy that began in 2015. In October 2018, investors began to worry that the Fed may be raising rates too soon and cause a mistake that would send the U.S. into a recession. Combine that with trade tensions with China and a nasty sell-off ensued. A loss of just seven more points on the S&P 500 Index would have officially ended the bull market, which began in 2009.
Sometimes, investors overreact causing market prices to move too far in one direction or another. There is an emotional component that can dictate actions among short-term traders. That is exactly what happened at the end of 2018.
2019 started off with a bang and was an unexpected surprise to the upside. People’s fears of a recession were unfounded. With only two exceptions, the market marched steadily upward for most of 2019. In May and August the rising tensions caused pullbacks of about 7% but these were shallow and didn’t last long. Anyone who did not panic at the lows of 2018 was rewarded with a terrific year last year.
We began the year with a Federal Funds rate of 2.25%-2.50% and ended the year with a rate of 1.50%-1.75%. Undoubtedly, it was a dramatic about-face that was dictated by a changing economic environment. Additionally, the Fed stopped shrinking its balance sheet. By year end, the Fed was back in the open market purchasing shorter term bonds and T-bills, at least temporarily. While it refuses to use the term “QE,” in effect, it’s employing a similar policy to what it used earlier in the last decade.
In December, Fed Chief Jerome Powell hinted that he is in no hurry to take back any of the rate cuts in 2020. Moreover, recession fears earlier in the year have subsided, and the U.S. and China will sign a limited, phase-one trade deal this month. It’s not the all-encompassing agreement that investors had hoped would be inked earlier last year, but it reduces near-term trade tensions.
New negotiations, which could eventually lead to a more comprehensive phase-two agreement, will resume, though the outlook for additional progress is murky. Bottom line—stocks finished the year in an impressive fashion.
The U.S. economy is incredibly dynamic. The attributes that make America the greatest nation in the world continue to pay economic dividends. Once again, the economy bounced back when many thought it was down for the count. There will be times when the outlook sours, but as we’ve seen time and time again, the U.S. economy has recovered and gone on to new highs.
We know that stocks can be unpredictable over a shorter period. While they are sometimes unpleasant, sell-offs are normal. But we take precautions to minimize volatility and, more importantly, keep you on track toward your financial goals.