This year has shaped up to be an excellent year for stock market returns. But in early-2019, it did not look like this year would good at all. Several stock market indices trended down starting in late-Summer or early-Fall in 2018 due to a global slowdown in manufacturing, contraction in some European economies, and very slow growth in China. This trend looked like it would extend into 2019 continuing to pressure stock markets. But a bottom for the broader stock market was reached in January 2019 and markets started recovering.
But still, it was not clear if the U.S. markets would have a good year. Manufacturing continued to contract, and tariff and trade headwinds built through the year. Many manufacturers have indicated that tariffs are negatively impacting their business resulting in job losses and higher costs. The Federal Reserve has recently published a new report on the negative effect of tariffs on U.S. manufacturers. In fact, business confidence is below 50 at the moment. The U.S. ISM Purchasing Managers Index (PMI) has been below 50 since August 2019 pointing to the fourth straight month of declining manufacturing through November.
There were also some other definite signs that the U.S. economy was slowing. Consumer loan delinquency rates have been rising. Banks willingness to lend has been dropping toward zero. CEO expectations minus consumer expectations are near a record low. Corporate profits as a share of the GDP has been coming down.
Moreover, the yield curve inverted, as the 10-year and 30-year U.S. Treasury yields dropped dramatically earlier this year. The 10-year yield dropped below that of the 2-year yield, which has historically been one of the most consistent recession indicators. This event has preceded every recession since 1950. But with that said, this indicator is a leading indicator with the downturn tending to hit hardest about 22 months after the inversion. So, from this perspective we should except a recession in 2021.
The Fed rode to the rescue by lowering the Federal Funds Rate. The Fed battled the negative headwinds of tariffs and slowing manufacturing with three reductions of the Federal Funds Rate in 2019. The New York Fed also conducted temporary Repo operations to boost liquidity in overnight lending markets between banks. This is the first time since the Great Recession that the Fed has acted in the overnight lending market. Although temporary, the Fed is now in the third month of conducting these Repo operations. Lastly, tariff and trade news improved somewhat as the U.S. and China spent the last couple of months at the negotiating table and seemingly came to a ‘Phase I’ agreement. The details are yet to be published. But markets responded favorably to the aforesaid events and continued to gain through the year.
At the time of writing this article, the Dow Jones Industrial Average (DJI) is up ~25% year-to-date, the S&P 500 is up ~29%, and the NASDAQ Composite is up ~39%, and the Russell 2000 is up ~25% assuming dividends are reinvested. These are excellent values. To put it in context, 2019 is shaping up to be the best year for the Dow Jones since 2017. Similarly, it seems like the best year for the S&P 500, NASDAQ Composite, and Russell 2000 since 2013.
In addition, many stocks are setting record highs. For instance, Microsoft Corporation (MSFT) is trading at near its 52-week and all-time high. The company is now worth over $1.2T, a value that was probably thought unattainable just a few years ago. In a second example, Apple Inc (AAPL) reached a market valuation of ~$1.29T. The list of stocks trading at 52-week and all-time high is lengthy. But the flipside of that is valuations have been going up. For example, Microsoft is trading at nearly 30X consensus forward earnings. But with that said, 2019 ended up being a winner for U.S. stock market.
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