Overall, 2019 has been eventful. The markets are ending the year close to record highs despite some serious challenges. Investors were concerned amid trade war escalations and yield curve inversion. However, the Dow Jones Index (DIA) and the S&P 500 (SPY) had one of their best years with gains of 24% and 29%, respectively, in 2019.
Fed policy overturned
The Fed was on an interest rate raising spree when we entered 2019. Notably, the Fed raised benchmark interest rates four times in 2018. The Fed was expected to continue the same path this year as well. After global slowdown indicators and a dry spell largely in the first half of the year, the Fed changed its course of action. In July, the Fed delivered a rate cut by 25 basis points—the first in more than a decade. In August and October, the Fed trimmed rates by another quarter-point each.
President Trump sporadically slammed Fed Chair Jerome Powell due to smaller and slower interest rate cuts. He wanted the rates should fall to zero or lower. For 2020, the Fed has indicated that it will hold the rates steady. The Fed’s next meeting is scheduled for January 28–29.
China trade war escalation and the Dow Jones
China’s trade war developments overshadowed the markets this year. The differences between the US and China escalated in May and August. The countries imposed tariffs and counter-tariffs. The stock markets exhibited weakness when a trade truce didn’t seem attainable.
However, after multiple rounds of negotiations, the US and China agreed on phase one of the trade deal. There were more trade talks in November. Phase one of the trade deal seemed possible. The optimism lifted the market sentiment, which helped the Dow Jones breach the milestone 28,000 level.
Under the partial truce, the US agreed not to impose any new tariffs. The US will also reduce existing tariffs on Chinese products. China has agreed to purchase more farm and energy products from the US. The interim trade deal will likely be signed within a week.
Yield curve inversion
In August, the ten-year Treasury yield fell below the two-year Treasury yield, which sparked recession fears. The “yield curve inversion” scenario suggests that investors’ confidence in the economy is declining. Also, the scenario shows that investors are concerned about future growth. Broader markets witnessed a notable sell-off after the yield curve inverted. The yield curve inverted earlier in 2007, which was followed by a recession in 2008. The ten-year Treasury yield fell to concerningly low levels close to 1.5% in August—the lowest levels since July 2016. However, the yield curve un-inverted again in October.
Recession fears intensified when the October PMI fell to concerning levels. Manufacturing activity contracted, which warned of an economic downturn.
In December, President Trump became the third president to be impeached by the House of Representatives. Now, the process is in the Senate. The chances of the Senate convicting President Trump are small due to the majority of Republicans there. As a result, investors largely overlooked the impeachment and markets continued to rise.
Apple stock outshone the Dow Jones
Apple (AAPL) stock outperformed broader markets and gained around 87% in 2019. Record iPhone and Airpod sales maintained the rally throughout the year. Microsoft (MSFT) stock rose almost 57% during the same period. Boeing (BA) stock, the top constituent of the Dow Jones, had a volatile year. The stock was weak due to the MAX 737 crashes and surrounding developments. Overall, the stock only gained 2% in 2019.
To learn about the Dow Jones Index’s best and worst stocks in 2019, read Dow Jones Index’s Top Gains and Losses in 2019.
Defensive stocks remained in focus for most of the year due to trade war and recession concerns. On average, utilities and consumer staples stocks rose 20% and 25%, respectively, in 2019. Safe-haven gold rose 18% this year.
Barring a few hiccups, 2019 was a bright year for the markets. The markets tackled significant challenges. Although things look positive right now, geopolitical risks will likely remain. Markets might be more volatile in 2020 due to the presidential election. We’ll have to see how high the markets go from their already record-high levels.