Bob’s Journal for 1/2

We experienced yet another tumultuous year in the economy and markets in 2019. Many people were surprised more than once.

Recall that as 2018 drew to a close, Federal Reserve officials were starting to indicate they might have made mistakes in 2018. Monetary policy was tightened significantly in 2018, and the effects were starting to become visible.

Indeed, at the end of 2018, the economy was slowing, and inflation was declining from its already-low levels. Stock markets around the globe were tumbling. The S&P 500 closed 2018 down 4.56% after losing 13.49% in the fourth quarter, while the Nasdaq 100 lost less than 1.00% for the year but tumbled 16.77% in the fourth quarter.

Investors and economists steadily increased the probability of a bear market and recession before the end of 2019.

Fed officials responded quickly. They announced monetary tightening was over. There would be no more interest rate increases and the efforts to reduce the Fed’s balance sheet would end.

Economic data still was sluggish, especially for housing and manufacturing, in the opening months of the year.

By mid-year, the Fed was reducing interest rates. In fact, the Fed would reduce rates three times by the end of 2019.

That was a major turnaround. In late 2018, both Fed officials and most market observers were expecting multiple rate increases during 2019. Instead, multiple rate decreases were implemented.

Stock prices rose early in the year after the Fed announced the end of tighter money. Even so, it took six months to make up the losses in the last two months of 2018.

Stocks surged late in the year after the Fed started cutting rates. Major U.S. stock indexes finished the year with solid gains. In fact, the S&P 500 and Nasdaq 100 had their best years since 2013 and closed 2019 near all-time highs.

The Fed wasn’t the only influence on the economy and markets. Trade policy and political conflicts also were major factors.

Public comments and rumors about the status of the trade negotiations between the United States and China directly influenced market behavior. When the talks seemed to be producing positive results, markets rose. When talks hit a snag, markets declined. Corporate officers also made it clear that the uncertainty about the trade war was keeping them from making major investments.

By the end of the year, a tentative trade deal was announced. The likelihood of a deal, coupled with the Fed’s interest rate cuts, were the basis for a late-year surge in stocks.

The impeachment of President Trump, rocky Brexit negotiations amid political turmoil in the United Kingdom, the beginning of the 2020 election campaign and a host of other events had little influence on the markets and economy. The year was centered on the Fed and trade policy.

As we start 2020, there’s no clear bellwether for the markets and the economy. The Fed seems determined to stay in the background as much as it can. President Trump seems to want the trade conflicts to disappear during the election year.

One question is whether a greater number of stocks will see their prices increase sharply. Most of the 2019 gains were focused in the largest technology companies, especially Apple (AAPL) and Microsoft (MSFT).

Value stocks have lagged since the financial crisis ended, though there were signs in late 2019 that value stocks might be ready to rally. Small company stocks also lagged in 2019 and appeared ready to make up some ground in 2020.

International stocks also lagged the last few years but started to turn around in 2019. I think that’s likely to continue in 2020. Gold had a strong rally in 2019, and I think gold will continue to do well in 2020.

U.S. bonds, especially long-term treasury bonds, had a great year in 2019. However, that’s something I don’t expect to continue in 2020. The Fed’s new policy is to keep short-term interest rates low, while allowing long-term rates to rise in anticipation of stronger growth and higher inflation. We finally could see the end of the long-term bond bull market that began in the early 1980s.

The Data

The Dallas Fed Manufacturing Survey for December broke the string of dismal manufacturing surveys, but even this report wasn’t uniformly good.

The General Activity Index that was compiled by the survey declined to negative 3.2 from negative 1.3. However, the widely followed Production Index increased to positive 3.6 from negative 2.4. While most components of the survey improved, some still are in negative territory.

The PMI Manufacturing Index declined to 52.4 in December from 52.6. This has been the most positive of the manufacturing surveys for a while. A number above 50.0 indicates that the sector is expanding.

The Chicago Purchasing Managers Index also showed improvement in December, rising to 48.9 from 46.3. That’s a four-month high, but levels below 50.0 indicate that the sector is contracting instead of growing.

Pending home sales, as reported by the National Association of Realtors (NAR), increased by 1.2% in November, compared to a 1.7% decline in October. Over 12 months, pending sales increased 7.4%.

New unemployment claims declined by 2,000, but last week’s number was revised higher by 2,000. The result is that the week’s claims were 222,000, the same as last week’s. The four-week average continues to increase because of the two weeks of sharp increases in mid-December.

The Markets

The S&P 500 rose 0.20% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 0.03%. The Russell 2000 declined 0.61%. The All-Country World Index (excluding U.S. stocks) added 0.41%. Emerging market equities gained 0.67%.

Long-term treasuries lost 0.99% for the week. Investment-grade bonds increased 0.09%. Treasury Inflation-Protected Securities (TIPS) added 0.03%, while high-yield bonds gained 0.13%.

In the currency arena, the dollar fell 1.10%.

Energy-based commodities lost 0.18%. Broader-based commodities rose 0.18% and gold gained 1.19%.

Bob’s News & Updates

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I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.