Economic Commentary | Fourth Quarter 2019

The market carried stocks higher during the fourth quarter while dominant themes echoed 2019’s earlier stories. Strength in the service sector offset manufacturing weakness throughout the globe, the ongoing uncertainty surrounding the trade dispute between the US and China created additional volatility, and central bankers around the world furthered their efforts to boost their economies through accommodative monetary policies. The S&P 500 index notched 21 new all-time highs during the quarter, bringing its return to +9.1% for the quarter. Our other benchmarks similarly fared well, with the mid/small cap Russell 2000 index gaining 9.9%, the international MSCI EAFE index rising 8.2%, and the emerging markets MSCI EM up 11.4%.

The impact of the tariffs implemented by the US and China began to weigh on global growth during the second half of 2019, particularly in the manufacturing sector. The IMF projected that 2019 would see the weakest growth in global GDP since the 2008 financial crisis and that the trade war would cost the global economy $700B by the end of 2020.
With both countries facing pressure at home to resolve their disagreement, the US and China ultimately reached terms on a tentative phase-one deal, much to the relief of market participants. This partial deal is expected to be signed in mid-January and includes China’s agreement to buy more agricultural products from the US while we have agreed to reduce some of the existing tariffs on Chinese imports and to not implement the new tariffs that were slated to begin in mid-December. What has not yet been resolved are the thornier issues of forced tech transfer and intellectual property theft, but at least the two countries have arrived at a detente for the moment.

The US economy supported solid job gains throughout the fourth quarter, a remarkable feat given the unprecedented duration of this economic expansion. The December jobs report marked an uninterrupted 110 months of job gains while the unemployment rate fell to a 50-year low of 3.5% and annualized wages gained more than 3%. The resulting gains in personal income enabled consumers to spend more while also shoring up their balance sheets, indicated by the savings rate nearing 8%. Housing gained this quarter as well, with prices moving solidly higher, building activity accelerating, and homebuilder sentiment reaching a high not seen since mid-1999. With modest inflation hovering near the Fed’s 2% target, the lack of pricing pressure further supports the robust health of the US consumer, which bodes well for continued strength in the services sector.

As tensions between the US and Iran heated up over the latter part of 2019, oil prices gained almost 13% during the fourth quarter following concerns about potential disruptions to the global oil supply. OPEC and Russia agreed in early December to cut production by 500K barrels/day, further boosting prices. Despite this increase, oil prices remain in the “sweet spot” between $50 and $60/barrel, which is low enough to maintain consumer spending yet high enough to make its production profitable over the longer-term horizon.

The UK held snap elections in December to break the impasse over Brexit, with Boris Johnson’s Conservative Party
winning in a landslide. Ultimately, this may not end well for the UK, but the election victory removed significant uncertainty as Johnson secured a mandate to depart the European Union by January 31, 2020.

Looking forward to the year ahead, the US economy appears to be poised to continue its record-breaking expansion, with recession fears easing, the global economy stabilizing, and inflation seeing a modest, yet healthy, uptick. As long as weakness in manufacturing does not bleed over to the service sector, we should continue to see an extension of the slow growth that has been the hallmark of this economic cycle.