Looking Back at the Markets in December and Ahead to January 2020

As I do every month, it’s time to take a look back at what happened in the previous one and what it could mean going forward. With the start of a new year, we have a lot to cover.

A look back

Great December caps off great year. U.S. markets were up by almost 2 percent or more for the month, and 25 percent or more for the year. International markets also saw a strong December and double-digit returns for the year. Fixed income did pull back a bit in December as rates rose, but it had a great year.

In fact, 2019 turned out to be much better than what was expected at the end of 2018. Markets were down by almost 20 percent on Christmas Eve of that year, on expectations of recession and fears of a trade war. Investors fully expected a disaster of a year—but they didn’t get it.

Steady growth a highlight. Instead, they got steady growth. Job creation actually accelerated during the year, especially toward the end. December’s job growth of 266,000 was well above the high end of expectations. Even though this figure was flattered by the end of the GM strike, it still showed that businesses continue to need and hire new workers. Job growth also kept consumer confidence high. Despite ongoing concerns about the future, confidence remains at close to the highest levels of the recovery. With a combination of money to spend and the confidence to spend it, 2019 also saw continued consumer spending growth (for nine straight months as of November), with personal spending up significantly through the year.

Not all the news was good. Manufacturing softened at the start of last year, with the advent of the trade war. It has remained mired in recessionary territory for most of the year, with December’s data showing that trend has not changed. Business investment has also been quite weak, with December’s data disappointing again.

Because of this weakness, the economy was dependent on consumer spending. Consumers stepped up to the plate, but that dependence hurt corporate performance. Earnings growth pulled back significantly and has been down for the past couple of quarters, with companies that depend on business spending more than offsetting those that benefited from consumer spending.

Lower rates reap benefits. Nonetheless, the decline in earnings growth was more than made up for by the decline in interest rates, driven by the Fed’s three rate cuts in 2019. This move was a significant reversal from what was expected a year ago and pushed stock valuations higher, outweighing the effects of slower earnings growth.

Lower rates also benefited housing, with home sales recovering from a midyear slump. Home builder confidence rose to a new high in December, while new home sales hit the highest level since 2007. Housing is a significant indicator of consumer willingness to spend, and this recovery is a positive indicator for 2020.

A look ahead

A positive start to the new year. All in all, despite some weaknesses, December’s data was quite positive and provides a good handoff to 2020. Consumer spending remains the key to continued growth and looks likely to keep delivering. That said, we will be watching job growth and confidence closely. Business spending is likely to remain depressed. But much of the damage looks to have been done already, so any recovery could represent an opportunity. Finally, the Fed’s rate cuts continue to act as a tailwind and are likely to do so through the next couple of quarters, as we are already seeing in the housing sector.

Real risks ahead. The solid economic foundation is good news because there are real risks out there for 2020. The Iran confrontation is the most immediate concern. It could certainly result in volatility, although any damage should be cushioned. Also, the impeachment process is still pending, and then we have the election. Any of these events could rattle markets. Despite the expected volatility, based on the data from December, the economy looks likely to continue to chug along at least for the next quarter or two—and the stock market should follow its lead.

Overall, after a strong December and 2019, the outlook for January remains positive.