What Happened in 2019: A Rising Tide Lifted All Boats
Salem’s proximity to the ocean may cause us to overdo it on the nautical references from time to time. However, I think that one is apt for 2019. We entered the year in a dark cloud. As I wrote about in last year’s review, two big worries weighed on stocks at the start of 2019:
- Trade tension, particularly with China, caused a great deal of uncertainty among CEOs. Economic data clearly showed a slowdown in corporate spending on things like new machines and facilities.
- Three interest rate hikes by the federal reserve in 2018 left financial conditions (that’s economist‑speak for the availability of money) tight.
With that backdrop, in rode Chairman Jerome Powell’s Fed, like the proverbial cavalry. As the calendar turned, he and other Fed members turned dovish in their speeches and other public appearances. They signaled future cuts to short-term interest rates. Those cuts, three of them, occurred in July, September, and October. Furthermore, the Fed created money and injected it into a short-term lending facility for banks. The Fed’s peers, at other European and Japanese central banks, also eased conditions.
As in the past, low interest rates and truckloads of printed money had a stimulative effect on global markets. Stocks around the world responded with very strong returns. US equities gained 31%, foreign developed equities gained 22% and emerging market equities were up 18%. Other asset classes like bonds, commodities, and real estate also had nice gains.
All these impressive returns came in the face of a mixed economic picture: The job market remained strong, but manufacturing indicators turned south. Company profit growth stagnated, about flat, compared to the year prior.
Strong 2019 returns, amidst weak earnings growth, leaves US stocks looking expensive compared to historical valuation levels as we start 2020. On the other hand, stocks do not look expensive when you consider the low-interest-rate environment in which we live. As we learned in 2019, interest rates matter a LOT when it comes to valuing assets.