4th Quarter 2019 Update

January 24, 2020

Key Points

• The global economic environment continued to lose momentum, driven by ongoing trade uncertainty and developed markets economies experiencing the slowdown phase of the business cycle.
• By most accounts the FOMC has seemed to have reversed the damage done by its decision in 2018 to raise interest rates too much and too quickly.
• Economists warn that one risk to the US economy in 2020 may be that because there are stark differences in the economic policies of President Trump and his Democratic rivals, uncertainty about the election’s outcome may alter consumer behavior such that it adversely impacts the economy.
• The consensus among analysts is that there will likely be no change in interest rate policy in 2020 absent a significant change in economic growth.

Below, we’ve highlighted broader market returns for the 4th quarter and year-to-date time periods:

Source: Refinitiv

The Global Economy

The Bureau of Economic Analysis released the third estimate of the third quarter 2019 real GDP, a seasonally adjusted annualized rate of 2.1%, slightly higher than the second quarter’s 2.0% annualized growth, and in line with the prior estimate. Growth slowed for much of the year, and employment gains also moderated commensurately. Consumers are currently serving as the engine for growth, and home sales and residential construction were also positive factors with the decline in mortgage rates. Business investment remains sluggish due to trade uncertainty and geopolitical risks. Corporate profits fell by 0.2% (not annualized) during the quarter. The Trump administration’s trade war with China and other trading partners remains the primary drag on growth, although economists believe the FOMC’s interest rate reductions in 2019 should begin to offset some of the negative impacts of tariffs. Analysts also expect President Trump to soften his trade stance heading into an election year.

Equities

After battling through the adverse seasonal headwinds at the beginning of the quarter, equity markets provided consistent and steady gains throughout the quarter. September and October are often difficult months for stocks, and 2019 was not an exception, as broad-based indices declined roughly 3.5% in the first week of October. However, as economic data remained solid, and as the trade situation continued to thaw, markets recovered and established new all-time highs. Within that context, the S&P 500 Index finished the quarter with a gain of +9.1%, with growth outperforming value. Small cap stocks, as represented by the Russell 2000 Index, slightly outperformed large caps, and finished the quarter with a total return of +9.9%.

International stocks delivered strong gains during the quarter, and generally performed in line with US equities. As in the US, global growth has slowed in recent quarters, but has remained positive.

Fixed Income

Fixed income securities’ prices and yields were impacted by several important factors during the quarter, including an acceleration in job growth and expectations for an easing in the trade tensions with China. In addition, Boris Johnson’s decisive re-election as UK Prime Minister is expected to bring greater clarity to the Brexit situation that has cast a cloud over the region for more than three years. For its part, the FOMC lowered interest rates once during the quarter, bringing the target federal funds rate range to 1.50%-1.75%

The Treasury yield curve steepened during the fourth quarter, with yields on the shortest-term maturities declining relative to yields in the intermediate- and long-term segments of the curve.

Summary

The US economy is in the midst of the longest expansion on record at 126 months, and at this point in the cycle the slowing growth that has been experienced should be expected. But the economy is nothing if not resilient, continuing to deliver gains in the face of the continuing trade war with China and other significant trading partners, geopolitical tensions, and deep political fissures that have resulted in the impeachment of President Trump.

By most accounts the FOMC has seemed to have reversed the damage done by its decision in 2018 to raise interest rates too much and too quickly. The committee’s three rate reductions in 2019 seem to have been enough for the economy to remain on track for continued modest growth. Expectations among economists are that President Trump and China’s President Xi Jinping will continue to de-escalate the trade war, both because of the damage it has already inflicted on the Chinese economy and the fact that 2020 is a Presidential election year in the US. The consumer has been the linchpin of growth not only in the US but across world economies. Many analysts believe the outlook for consumers remains bright as a result of the combination of household deleveraging that has occurred over the past decade and growth in personal income.

Economists warn that one risk to the US economy in 2020 may be that because there are stark differences in the economic policies of President Trump and his Democratic rivals, uncertainty about the election’s outcome may alter consumer behavior such that it adversely impacts the economy. Elections have historically had little impact on the economy, but some economists believe that with the prevailing deep political divide 2020 may be an exception.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

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