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Annual Market Review

Annual Market Review

Annual Market Review 2019

ANNUAL MARKET REVIEW 2019

Overview

The year 2019 was solid for investors even though it began with the government stymied by a shutdown, and ended with articles of impeachment levied against the president. In between, both domestic and global economies showed signs of slowing, all while the trade dispute between the United States and China loomed throughout the year. Nevertheless, investors remained relatively bullish toward stocks, pushing several major indexes to record highs.

While domestic economic growth may have slowed in 2019 compared to 2018, it showed resilience and stamina. The third-quarter gross domestic product expanded at an annualized rate of 2.1% — moderately down from 2018’s 3.0% rate, yet still strong enough to outpace global economic growth by a considerable margin. Consumer spending — which accounts for about two-thirds of the U.S. economy — surged, buoyed by a strong labor market, near-record unemployment, solid wage growth, and a burgeoning stock market. All told, the domestic economic expansion continued into its 11th straight year, the longest run in U.S. history.

Last year saw trade disputes between the United States and several of its trade partners reach an accord, but the trade war with China roared. The world’s two largest economies engaged in a tit-for-tat skirmish, with each country volleying tariffs on their respective imports at the expense of the exporting nation. Coincidentally, a limited deal was announced just before the holiday shopping season, with the U.S. agreeing to forgo new tariffs and China assenting to allow more U.S. agricultural imports. Further negotiations are presumed, but the relationship between the economic giants remains tenuous at best.

Not only did the ongoing trade war affect global economies, but it also impacted domestic business investment, industrial production, and exports. Part of the justification cited by the Federal Reserve for lowering interest rates three times last year was weakness in business fixed investment and exports. As of November, new orders for durable goods were down 1.3% from the same period in 2018, and business (nonresidential) investment fell 2.3% in the third quarter.

The new year begins with a strong stock market and solid economic growth. The Secure Act, passed in late December, should change the retirement planning (and saving) landscape to some extent. However, the Treasury budget deficit for fiscal 2019 (October 2018-September 2019) exceeded $98 billion — 26% higher than the 2018 fiscal-year deficit. The trade war with China may cool with more mutual concessions, or accelerate, which would continue to dampen global economic growth. The new year will begin with the impeachment process and end with November’s presidential election. What happens in between is anyone’s guess. Will unemployment and inflation remain low? Will stocks continue to experience growth? Will oil and gas prices moderate or surge? Will the domestic economy continue to accelerate, or suffer a setback? Can the world economy recover, or will it continue to stagnate? If nothing else, 2020 looks to be an interesting year.

Market / Index 2018 Close As of 9/30 2019 Close Month Change Q4 Change 2019 Change
DJIA 23327.46 26916.83 28538.44 1.74% 6.02% 22.34%
NASDAQ 6635.28 7999.34 8972.60 3.54% 12.17% 35.23%
S&P 500 2506.85 2976.74 3230.78 2.86% 8.53% 28.88%
Russell 2000 1348.56 1523.37 1668.47 2.71% 9.52% 23.72%
Global Dow 2736.74 3021.34 3251.24 3.18% 7.61% 18.80%
Fed. Funds 2.25%-2.50% 1.75%-2.00% 1.50%-1.75% 0 bps -25 bps -75 bps
10-year Treasuries 2.68% 1.67% 1.91% 14 bps 24 bps -77 bps
Market/Index DJIA
2018 Close 23327.46
As of 9/30 26916.83
2019 Close 28538.44
Month Change 1.74%
Q4 Change 6.02%
2019 Change 22.34%
Market/Index NASDAQ
2018 Close 6635.28
As of 9/30 7999.34
2019 Close 8972.60
Month Change 3.54%
Q4 Change 12.17%
2019 Change 35.23%
Market/Index S&P 500
2018 Close 2506.85
As of 9/30 2976.74
2019 Close 3230.78
Month Change 2.86%
Q4 Change 8.53%
2019 Change 28.88%
Market/Index Russell 2000
2018 Close 1348.56
As of 9/30 1523.37
2019 Close 1668.47
Month Change 2.71%
Q4 Change 9.52%
2019 Change 23.72%
Market/Index Global Dow
2018 Close 2736.74
As of 9/30 3021.34
2019 Close 3251.24
Month Change 3.18%
Q4 Change 7.61%
2019 Change 18.80%
Market/Index Fed. Funds
2018 Close 2.25%-2.50%
As of 9/30 1.75%-2.00%
2019 Close 1.50%-1.75%
Month Change 0 bps
Q4 Change -25 bps
2019 Change -75 bps
Market/Index 10-year Treasuries
2018 Close 2.68%
As of 9/30 1.67%
2019 Close 1.91%
Month Change 14 bps
Q4 Change 24 bps
2019 Change -77 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

The Economy (through November 2019)



The unemployment rate inched down 0.1 percentage point to 3.5% in November as the number of unemployed persons dipped from 5.86 million in October to 5.81 million in November. Total employment rose by 266,000 in November after adding 156,000 (revised) new jobs in October. The average monthly job gain through November is 180,000 (223,000 in 2018). Notable employment increases for November occurred in manufacturing (54,000), health care (45,000), professional and technical services (31,000), leisure and hospitality (45,000), and transportation and warehousing (16,000). The labor participation rate fell 0.1 percentage point to 63.2%, and the employment-population ratio remained at 61.0%. The average workweek remained at 34.4 hours for November. Average hourly earnings rose by $0.07 to $28.29. Over the last 12 months ended in November, average hourly earnings have risen 3.1%.



According to the third and final estimate for the third-quarter gross domestic product, the economy accelerated at an annualized rate of 2.1%, up from the second quarter’s 2.0% annual growth rate. The first quarter saw an annualized growth of 3.1%. Growth in consumer spending (personal consumption expenditures), which accounts for roughly two-thirds of the GDP, slowed from 4.6% in the second quarter to 3.2%. Gross domestic income increased 2.1% in the third quarter, compared with an increase of 0.9% in the second quarter. The personal consumption expenditures price index increased 1.5% in the third quarter. November saw the federal budget deficit grow to $208.8 billion, $74.0 billion over October’s deficit. The government spent roughly $434.0 billion in November and had receipts of $225.2 billion. Most of the government outlays were for Social Security ($89 billion), Medicare ($83 billion), and national defense ($63 billion). Individual income taxes accounted for the majority of receipts ($106 billion), followed by social insurance and retirement receipts ($97 billion). Corporate income taxes accounted for a little over $0.5 billion.



According to the Personal Income and Outlays report, inflationary pressures remain weak, as prices for consumer goods and services rose 0.2% in November, the same increase as in October. Prices are up 1.5% over the last 12 months. Consumer prices excluding food and energy rose 0.1% in November (0.1% in October) and are up 1.6% year-over-year. Personal income and disposable (after-tax) personal income each advanced 0.5% ahead of October’s respective figures. Consumers continued to spend, as personal consumption expenditures increased 0.4% in November after expanding 0.3% the previous month.

The Consumer Price Index climbed 0.3% in November following a 0.4% increase in October. Over the 12 months ended in November, the CPI rose 2.1%. Increases in shelter and energy were major factors in the CPI increase. Energy prices increased 0.8% on the month with gasoline up 1.1%. Prices less food and energy rose 0.2% in November, the same increase as in October. Since last October, core prices (less food and energy) are up 2.3%.

Prices producers receive for goods and services rose 0.4% in November following a similar October jump. The index increased 1.1% for the 12 months ended in November. Producer prices less foods, energy, and trade services was unchanged in November after inching up 0.1% in October. For the 12 months ended in November, prices less foods, energy, and trade services moved up 1.3%, the smallest advance since climbing 1.3% in the 12 months ended September 2016. Prices for goods rose 0.3% in November while prices for services edged down 0.3%.



The housing sector has been anything but consistent this year. After rising 1.9% in October, sales of existing homes dropped 1.7% in November. Year-over-year, existing home sales are up 2.7%. Existing home prices advanced in November to a median price of $271,300, compared to $270,900 in October. Existing home prices were up 5.4% from November 2018. Total housing inventory at the end of November sat at 1.64 million units (representing a 3.7-month supply), down from October’s 3.9% inventory rate. After falling 0.7% in October, sales of new single-family home advanced 1.3% in November, and are 16.9% above the November 2018 estimate. The median sales price of new houses sold in November was $330,800 ($316,700 in October). The average sales price was $388,200 ($383,300 in October). Available inventory, at a 5.4-month supply, remained about the same in November as it was in October.



Industrial production and manufacturing production both rebounded 1.1% in November after declining in October. These sharp November increases were largely due to a bounce back in the output of motor vehicles and parts following the end of a strike at a major manufacturer. Excluding motor vehicles and parts, the indexes for total industrial production and for manufacturing moved up 0.5% and 0.3%, respectively. In November, mining output fell 0.2% (-0.7% in October), while utilities increased 2.9% after falling 2.4% in October. Total industrial production was 0.8% lower in November than it was a year earlier. Following an October increase, new orders for durable goods fell 2.0% in November. Excluding transportation, new orders were virtually unchanged. Excluding defense, new orders expanded by 0.8%. Helping drive the decrease in durable goods orders were retractions in defense aircraft and parts (-72.7%), nondefense aircraft and parts (-1.8%), machinery (-1.6%), and transportation equipment (-5.9%). New orders for capital goods (used by businesses to produce consumer goods) dropped 7.8% in November after climbing 3.8% in October.



Both import and export prices inched higher in November. Import prices rose 0.2% after falling 0.5% in the prior month, an increase largely driven by higher fuel prices. Import prices excluding fuel dropped 0.1% in November. Import prices declined 1.3% from November 2018 to November 2019. The 12-month decrease was the smallest over-the-year decline since the index fell 0.9% during the 12-month period ended May 2019. Export prices advanced 0.2% in November after declining 0.1% in October. Overall, export prices dipped 1.3% over the past year. Agricultural export prices rose 2.2% in November, while nonagricultural prices for items such as consumer goods, automobiles, and industrial supplies and materials were unchanged, but are down 1.6% during the 12 months ended in November. The latest information on international trade in goods and services, out December 5, is for October and shows that the goods and services deficit was $47.2 billion, $3.9 billion less than September’s revised $51.1 billion deficit. October exports were $0.4 billion less than September exports. October imports were $4.3 billion under September imports. Year-to-date, the goods and services deficit increased $6.9 billion, or 1.3%, from the same period in 2018. Exports decreased less than 0.1%. Imports increased 0.2%. The advance report on international trade in goods (excluding services) revealed the trade deficit fell to its lowest level in three years in November. The international trade deficit was $63.2 billion in November, down $3.6 billion from $66.8 billion in October. Exports of goods for November were $136.4 billion, $0.9 billion more than October exports. Imports of goods for November were $199.6 billion, $2.7 billion less than October imports.



British Prime Minister Boris Johnson’s Conservative Party scored a resounding electoral victory in last month’s parliamentary elections, likely securing Britain’s exit from the European Union. The gross domestic product for Great Britain rose 0.4% in the third quarter, lifting the annual economic expansion to 1.1%. In what is claimed as support for more open trade globally, China agreed to cut import tariffs on frozen pork, pharmaceuticals, and some high-tech components beginning January 1, 2020.



Consumer confidence fell again in December for the second consecutive month. The Conference Board Consumer Confidence Index® registered 125.5 in December, down from 126.8 in November. The Present Situation Index — based on consumers’ assessment of current business and labor market conditions — increased from 166.6 to 170.0. The Expectations Index — based on consumers’ short-term outlook for income, business and labor market conditions — decreased from November’s 100.3 to 97.4 in December.

Eye on the Year Ahead

Economic growth slowed in 2019, but not enough to prompt investors to avoid stocks. Fears of a global economic slowdown continuing into 2020 may affect the U.S. economy as well. The housing market hasn’t picked up the pace and is generally lagging behind other economic mainstreams. Ongoing global trade negotiations between the United States and China should bode well for the U.S. and global economies. Ultimately, our economy, equity markets, and standing in the world depends on the outcome of the impeachment proceedings and November’s presidential election.