December 2019 Market Review
-Darren Leavitt, CFA
US equity markets continued their ascent in December in what was an impressive showing for the markets in 2019. Trade policy negotiation between the US and China continued throughout the month with an initial agreement designated as “Phase One” being approved. Elsewhere on trade, UK voters provided Boris Johnson a clear mandate on Brexit, the US imposed tariffs on Argentina, Brazil, and France, and the US congress voted the USMCA trade agreement into law. Global central banks continued to be accommodative with the US Federal Reserve and European Central Banks, maintaining their policy rate ranges. Donald Trump was also impeached although it had little effect on the markets. Global economic data continued to show a sluggish manufacturing sector. In the US, employment continued to be robust. US consumer confidence also had a nice uptick during the month.
The S&P 500 gained 2.86% during the month of December and had an annual gain of 28.9%. The Dow rose 1.74% for the month and ended the year 23.8% higher. The NASDAQ led all other averages in December and for the year with a gain 3.54% and 35.2%, respectively. The small-cap Russell 2000 inked a 2.71% increase for the month and was up 24% for the year. The US Treasury yield curve steepened in December with the 2-year note yield falling three basis points to 1.57% while the 10-year bond yield rose 14 basis points to close at 1.92%. For the year, US Treasury yields fell across the curve. The 2- year note yield lost ninety-three basis points, the 10-year lost seventy-seven basis points, and the 30-year bond shed sixty-two basis points. Gold continued to shine in December with a monthly gain of 3.6% and closed the year at $1523.60. The precious metal gained nearly 19% over the year. West Texas Intermediate Oil rallied 10% during the month and increased 35.4% over the year closing at $61.48 a barrel. The big move in December was induced by a production cut spearheaded by OPEC. Notably, Saudi Aramco came public in December with the largest Initial Public Offering (IPO) of all-time. The offering valued the company at $1.88 Trillion which is the largest company in the world.
Trade dominated the headlines throughout the month. US and China negotiations oscillated from week to week, and the Trump tweets continued to add volatility at times for investors. In the end, a December 15th deadline which would have imposed another tranche of tariffs, was avoided. Both sides reduced tariffs, and China agreed to buy 40-50 billion in US agricultural goods. “Phase One” is set to be signed on January 15th in Washington DC with negotiations on “Phase Two” to begin immediately after the signing. In the UK, markets rallied on a landslide win by Boris Johnson. The election was seen as a proxy for the next steps in Brexit. Investors will look to the end of January for more answers on the direction of Brexit negotiations, but it seems clear that a negotiated departure from the EU rather than I hard exit would benefit both parties and alleviate some market risk in the region.
Central banks continue to be accommodative, providing numerous sources of liquidity. In the US the Federal Reserve made a unanimous decision to keep the Fed Funds rate range at 1.50% to 1.75%. The outlook for the Fed Funds rate in 2020 is the same signaling no hikes and no cuts. Inflation continues to be in check and economic activity appears to be okay but with some concerns in the manufacturing sector. Separately, the European Central Bank left its policy rate unchanged as well at -0.50%, and continued its bond purchasing program. Christine Lagarde, President of the ECB and former head of the International Monetary Fund, presided over her first meeting as President and indicated that she sees some signs of economic recovery in the region. China’s central bank, the PBOC, also continued to provide stimulus to the Chinese economy most recently by reducing the reserve requirement ratios on bank deposits which should increase lending by 115 billion. All of this accommodation from the global central banks continue to help global risk assets and is a fundamental reason for the excellent returns we saw this year in the markets.
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