It was a year that began with investors courting a bear market and ended with the biggest gains from stocks since 2013.
Twelve months ago, few could have imagined the S&P 500 delivering a gain of more than 28% in 2019. It was a performance that flirted with the 31% gain of 1997, and one that came very close to topping the 29.6% return of 2013.
The tech-heavy Nasdaq did even better, posting a gain of nearly 35% as money flowed to the tech giants, cementing Apple and Microsoft’s position as trillion-dollar companies. The Dow Jones Industrial Average was up about 22%.
It was a year filled with fears that were never realized: a global economic slowdown, disruptive trade wars and potential missteps from Federal Reserve policy. The year also revealed an unforeseen boom in the tech sector that drove the major stock indexes ever higher.
Starting from a low
One of the key’s to the market’s 2019 success was starting from a low base.
A steep sell-off in December 2018 left the S&P 500 just 0.2% from officially hitting a bear market, defined as a 20% decline from its closing peak.
The S&P 500 ended 2018 with a loss of more than 6%, closing at 2,485.74 on Dec. 31, 2018. In the final hours of trading in 2019, it’s trading around 3,220.
For perspective, the S&P is finishing 2019 about 10% above 2018’s high of roughly 2,900, which is close to the average return for the S&P 500 over 90 years of 9.8%.
Help from the Fed
The Marriner S. Eccles Federal Reserve Board Building in Washington, D.C.
Jabin Botsford | The Washington Post | Getty Images
Much of the stock market’s gains in 2019 can be attributed to a dramatic policy shift at the Federal Reserve.
The Fed raised rates four times in 2018, including a December 2018 hike that took its key rate to 2.5 percent.
It was a different story in 2019, when after a change of heart the Fed lowered rates three times. Falling interest rates sent investors on a quest for yield, forcing more money into stocks expected to appreciate, pay dividends or both.
The Fed’s key rate is now back to a range of 1.50% to 1.75%. Additionally, the Fed has said it expects to leave rates unchanged for 2020, giving investors clarity on top of what remain historically low rates.
President Donald Trump meets with China’s President Xi Jinping at the start of their bilateral meeting at the G20 leaders summit in Osaka, Japan, June 29, 2019.
Kevin Lemarque | Reuters
Fed Chairman Jerome Powell described the central bank’s moves as “insurance” rate cuts. The Fed wanted to ensure a slowing global economy didn’t drag down the U.S.
One of the biggest uncertainties for global economic growth was President Donald Trump’s trade negotiations with China as well as the re-crafting of the North American Free Trade Agreement with Canada and Mexico.
Indeed, trade war headlines dominated the financial news throughout most of the year. Trump’s tariffs and threats of more tariffs often sent indexes frightfully lower. Then his pronouncements, usually by tweet, that deals were coming together, would send markets back even higher.
Over the course of the year, however, the trade war had only transient effects on the stock market.
As the year came to a close, the House passed the United States-Mexico-Canada Agreement, which is Trump’s replacement for NAFTA, and the Senate is expected to pass it soon. Also, the Trump administration has come to a phase one trade agreement with China.
When U.S. and China officials sign the deal in the coming weeks, it hardly means an end to what are sure to be difficult negotiations, but the initial agreement has marked a pause in trade war escalation, and that has sharply boosted markets.
Global economic slowdown
A tug boat passes the the CSCL Bohai Sea cargo ship docked at the Port of Oakland in Oakland, California.
David Paul Morris | Bloomberg | Getty Images
Throughout 2019, investors fretted a slowing global economy. Some of those fears stemmed from disruptive trade wars and tariffs, another was the U.K.’s plans to depart from the European Union, often called Brexit, and fears of voters around the world shifting to the far left.
The International Monetary Fund has recently downgraded its 2019 estimate for global economic growth to 3%, the lowest since the financial crisis.
But as the year came to a close, it appeared the U.K. would more likely achieve a negotiated exit from the EU versus a hard one and trade tensions eased with the phase one deal between the U.S. and China.
And some economists are expressing hopes that the global economic slowdown is bottoming.
Fueling the economy
Investors monitor a screen displaying stock information at the Saudi Stock Exchange (Tadawul) following the debut of Saudi Aramco’s initial public offering (IPO) on the Riyadh’s stock market, in Riyadh, Saudi Arabia, December 11, 2019.
Ahmed Yosri | Reuters
Energy was the worst-performing sector of the S&P 500 in 2019. But oil is still the fuel of capitalism and depressed prices helped bolster economic activity around the globe.
There’s been a recent uptick in prices, with West Texas Intermediate crude futures trading for more than $60 a barrel, but by historical standards, that’s hardly disruptive.
Despite sluggish energy markets, one of the highlights of 2019 was Saudi Aramco’s initial public stock offering. The oil giant has reached a valuation of $2 trillion, becoming the most valuable company in history.
An ominous sign
In August, investors began parsing the meaning of a rare market phenomena known as the inverted yield curve.
This occurs when short-term interest rates are higher than longer term rates, and it’s often a bad sign for the economy. Historically, when the yield curve inverts, a recession follows within one or two years.
Recession fears indeed swelled as the yield curve inverted. Investors also began to considered a $17 trillion pile of negative-yielding debt from sovereign nations, mostly in Europe. A negative yielding bond would have a yield of less than zero if held to maturity.
As the year progressed, bond markets stabilized and the yield curve that investors had feared finally steepened on optimism that the U.S. economy wouldn’t slow as much as expected and on expectations that the Federal Reserve will hold its benchmark interest rate at its current level, after cutting it three times this year.
The spread between the 2-year and 10-year Treasuries has now widened to the highest level since October, indicating that investors believe the global growth scare has been mitigated by rate cuts from the Fed and other central banks.
Mixed economic data
A General Motors hi-lo driver moves newly assembled engines, used in a variety of GM cars, trucks and crossovers, from final assembly at the GM Romulus Powertrain plant in Romulus, Michigan, August 21, 2019.
Rebecca Cook | Reuters
U.S. manufacturers also sent out warning signs in 2019. The Institute for Supply Management reported that manufacturing activity in the U.S. contracted for the fourth straight month in November. The manufacturing contraction has been a key part of the economic slowdown narrative.
On the other hand, the ISM’s non-manufacturing index continues to expand, meaning the service sector is still running strong.
It seemed whatever negative turns the economic data took in 2019, it was always offset by strong consumer spending and a historically low unemployment rate – currently 3.5 percent.
Two stocks accounted for nearly 15% of the S&P 500’s gains, according to S&P Dow Jones Indices. Apple was up 85% and Microsoft was up 15%.
The two tech giants are the only two U.S. companies with a market capitalization of more than $1 trillion. And in a cap-weighted index like the S&P, they have an outsized influence.
Facebook, Alphabet (Google’s parent company), and Amazon also contributed.
Semiconductor companies were also big gainers with Advance Micro Devices, Lam Research and KLA Corp. leading the index with the largest gains.
In the end, 2019 enjoyed a confluence of booming technology and easy money from the Fed, and it proved the age-old Wall Street maxim that markets climb a wall of worry — perhaps more than any other year.