December Market Commentary

US stocks finished the year strong, reaching new record highs and posting the best year since 2013 on positive US/China trade developments and encouraging economic news.  President Trump announced he would sign a phase one trade deal with China in mid-January.  The deal will reduce existing tariffs on Chinese goods and canceled new tariffs that would have taken effect during the month, while China will increase purchases of US farm goods by $32 billion, increase intellectual property protection, open the Chinese financial services market and prevent currency manipulation.  The US will cut the tariff rate on roughly $120 billion of Chinese goods from 15% to 7.5%.  In addition, the President and Congress agreed on a trade deal between the US, Canada, and Mexico setting up passage in early 2020.  Economic news continued to be solid in December.  Hiring in November blew past expectations with 266,000 new hires and previous months’ hires were revised up by 41,000. The unemployment rate also declined to 3.5% and wage growth edged up to 3.1%.  Retail spending from November 1st through Christmas Eve rose 3.4% from last year. Business activity reached a five-month high and consumer sentiment rose in December.  On the downside, in November US manufacturing activity moved further into contraction territory.  In December, US stocks rose 2.89% and surged 9.10% over the fourth quarter.  For the year, US stocks posted a 31.02% gain.

Foreign stocks climbed over the month on US/China trade talks and more clarity around Brexit to post a strong bounce-back a year from 2018.   In addition to reaching a phase one deal with the US, China said it would cut tariffs as of January 1st with all trading partners on a range of goods. Manufacturing and consumer spending both improved in China in November as well. Japan approved a $120 billion stimulus plan, its most significant stimulus measure in over three years.  In the eurozone, manufacturing activity contracted less than expected in November.  The European Central Bank held its benchmark rate steady after new chief Lagarde’s first meeting as she detected “some initial signs of stabilization” in eurozone growth.  Prime Minister Johnson’s snap election in Britain resulted in a solid majority for his party in Parliament clearing the way for the UK to leave the EU on January 31st. OPEC agreed to cut crude oil output by roughly 40% next year as it pushed for higher prices.  Emerging markets topped developed markets for the month and fourth quarter but trailed developed markets for the year.  Foreign stocks were up 4.35% in December and climbed 9.10% in the fourth quarter.  Over 2019 foreign stocks surged 22.20%.

Bonds edged up slightly to end the year as interest rates rebounded from their lows for the year. However, over 2019 interest rates dropped significantly driven by the Fed’s policy reversal.  After raising the Fed Funds rate four times in 2018, the Fed switched gears and made three quarter percent interest rate cuts in 2019 to cushion the US economy from slowing global growth.  At their last meeting of the year, the Fed announced that they were holding rates steady for the time being.  The rate-setting body currently expects to leave the Fed Funds rate unchanged in 2020.  The 10-year Treasury yield ended the year at 1.92%, up from 1.78% to start the month, but down substantially from the 2.69% where it started the year.  For the month and quarter, shorter-term bonds generally outperformed longer-term bonds, while longer-term bonds outpaced shorter-term bonds over 2019. Credit and Muni bonds were the top-performing sectors for the month and fourth quarter, while credit bonds were the top performer for the year to date.  The US bond market edged up 0.13% in December and 0.37% over the fourth quarter.  For the year, bonds gained 6.80%.