The stock market finished 2019 with a bang, rallying to all-time highs before the end of the year. All the major sectors of the market finished the year in positive territory. The largest gains came in the technology, communication services, and financial services sectors. Concerns over the global impact of the trade war abated as the US and China moved closer to completing a “phase one” trade agreement. The Federal Reserve indicated rates would be kept low to support economic growth.
In the absence of a major geopolitical shock, a recession in 2020 seems unlikely. Economic growth is expected to slow, but not stall. The Federal Reserve’s projections are for 2.2% GDP growth this year, and 1.9% in 2021. The Fed’s projections are dependent on both low inflation, and low interest rates.
Risks and Opportunities
The biggest risks to the economy are a sudden increase in inflation and energy prices, or a decrease in consumer confidence. Historically, most recessions were preceded or accompanied by a large spike in the price of oil. New technology has allowed the US to become the top oil-producing nation in the world. Unlike previous economic cycles, a substantial amount of global oil production now happens on US soil. This should provide the US economy with a layer of protection against energy price shocks.
The US consumer continues to be healthy. There are now more job openings in the United States than there are people seeking work. There are also signs the long-term trend of declining labor force participation has abated. Despite the tariffs and trade war, US consumers continue to carry the global economy by spending at a record pace.
On the Lookout for a Correction
In the long run, economic fundamentals drive the market. In the short run, the market can react to news about the economy in unexpected ways. During 2018, corporate earnings growth was strong, but the market finished the year lower. In 2019, earnings growth was flat, but the market posted an extremely strong performance. History shows what we should expect from the market in the long run, but short term movements of the market can be difficult to predict.
The long-term trends of the current bull market are in line with historical bull markets in the 1950’s and 1980’s.
After a strong positive year in the market, a repeat performance is unlikely. With election season around the corner, more volatility is likely. Markets average one 14% drop annually. Despite strong economic fundamentals, a significant pullback wouldn’t surprise students of market history. The market is still the best way for investors to create and grow wealth in the long run. The best advice headed into an election year may be to turn off the news and don’t make important decisions based on emotions. Take the time to make sure all aspects of your financial plan are on solid footing.
Peter C Golotko | CPA/PFS, MBA
President | Chief Executive Officer | Partner