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U.S. Market Equity Update

Authors: Edward Su VP of Education/Research, Michael Jung Research Analyst

Summary of 2019

“Bull markets climbs a wall of worry”

2019 was the epitome of this statement. Headwinds were strong all year with a weak global economy, manufacturing industry recession, yield curve inversion, intensified geopolitical risk, heightened trade disputes, and aggressive monetary policies. Additionally, on December 18th, the House of Representatives impeached the U.S. President but the equity markets still surged. Driven by U.S. consumer resilience and more importantly the Fed’s expansionary monetary policy, the equity markets arguably had one of their best years since 2009.

Highlight Events

2019 started off with gloomy outlooks and the longest U.S. government shutdown ever recorded. Fortunes turned quickly though as the equity markets rebounded from their terrible performance in December 2018. As the year progressed, U.S and China’s trade dispute added uncertainty to markets and hit its extremes in August when U.S. President Trump responded to the Fed’s July rate cuts by threatening to impose 10% of tariffs on $300bn of Chinese goods. The equity market responded with a slowdown, but long-term yields crashed which resulted in an inverted yield curve, signaling a potential recession in the near future. In order to mitigate this situation, the Fed’s decided to cut rates twice in September and October to recover long-term yields and reduce fear of economic slowdowns. However, during this last quarter of 2019, the two governments surprisingly were able to reach some consensus with Phase 1. Furthermore, the Fed’s declaration of no rate hikes for the foreseeable future, brought optimal investment conditions, fueling investor confidence and the equity markets to reach its peak by year end.

Figure 1. S&P 500 and U.S. 10-year Treasury Yields from June 2018 to December 2019.

Market Performance Review

In 2019, the Nasdaq 100 and S&P 500 were the leading U.S. equity index with gains of 38% and 28.9%, respectively. Looking at the market gains through sectors, most industries had astonishing performance while the technology sector thrived the most. Technology had its best year since 2009 with a 48% industry increase with Apple and Microsoft accounting for 8.2% and 6.6% growth in S&P 500 index, respectively. Disappointingly however, the energy sector underperformed with a gain of 7.6% and placed last of the 11 Global Industry Classification standard sectors for the second year in a row.

Going into 2020

As investors enter 2020, existing concerns are already growing. Particularly, the recent Purchasing Managers' Index data indicated its lowest since 2009 amplifying the concern of the global recession in the manufacturing industry. This suggests longer recovery periods for the global economy which may adversely affect the equity markets. Furthermore, geopolitical tensions still exist as a) the U.S.’s recent attack on Saudi Arabia is yet to be resolved and b) the U.S. government is aiming to start yet another trade war with Europe. These events may affect the equity market drastically at any given time which investors must continuously look out for. Despite these risks, however, many analysts forecast that global economic recovery will continue in 2020 while U.S. equity markets experience moderate growth. Analysts believe the Fed’s decision to maintain dovish rates to mitigate low U.S. inflation and residing trade tensions with China will continually drive market growth well into 2020.