Data as of December 31, 2019
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Stocks recorded solid gains in the fourth quarter, helping the large‑cap S&P 500 Index notch its best yearly gain since 2013—albeit one measured off a low base established by steep declines the previous December. The gains helped lift most of the major indexes into record territory, while the small‑cap Russell 2000 Index remained roughly 4% below its August 2018 peak. Technology shares performed best within the S&P 500 Index, helped by strong gains in Apple and Microsoft, which, together, ended the year accounting for nearly 40% of the sector’s market capitalization. Health care shares were also especially strong after underperforming earlier in the year. The small real estate sector declined slightly and was the sole segment to record a loss on a total return (including dividends) basis.
Investors Celebrate “Phase One” Trade Deal With China
The U.S.‑China trade dispute loomed large over sentiment through most of the quarter. Shares rallied sharply early in the period, as reports emerged that the two sides were nearing a partial trade deal that would at least avert the imposition of new tariffs, as President Donald Trump had threatened in the summer. Just before markets closed on October 11, the president announced that the two sides had agreed to the outlines of a “phase one” deal in which the U.S. would suspend planned tariff increases in return for increased purchases of U.S. agricultural goods by China, along with unspecified provisions regarding protection of intellectual property and access for financial services firms.
Markets fluctuated in the middle of the quarter, as particulars of what was included in the deal and when it would be signed failed to emerge. On December 13, however, the Chinese announced that the two sides had settled on a plan to lower tariffs. The White House then confirmed that the U.S. would lower the tariff rate on about USD 120 billion in Chinese goods from 15% to 7.5% while canceling the upcoming tariffs on nearly USD 160 billion in largely consumer‑related imports from China. On December 31, President Trump announced in a tweet that the trade pact would be signed at the White House on January 15 and that he would later travel to China for negotiations of a “phase two” deal. T. Rowe Price traders noted that congressional approval of the U.S.‑Mexico‑Canada (USMCA) trade agreement and the diminished threat of new auto tariffs also seemed to bolster sentiment as the quarter ended.
|Dow Jones Industrial Average||6.67%||25.34%|
|S&P 500 Index||9.07||31.49|
|Nasdaq Composite Index||12.17||35.23|
|S&P MidCap 400 Index||7.06||26.20|
|Russell 2000 Index||9.94||25.52|
Past performance is not a reliable indicator of future performance.
Note: Returns are for the periods ended December 31, 2019. The returns include dividends based on data compiled by T. Rowe Price, except for the Nasdaq Composite, whose return is principal only.
Sources: Standard & Poor’s, LSE Group. See Additional Disclosures.
Consumer Stays Resilient as Manufacturing Sector Slows
Fading recession fears also seemed to drive markets higher. Stocks had their best day of the quarter on October 4, after the Labor Department reported that employers had continued to add jobs at a decent pace (136,000) in September while revising previous months’ payroll gains higher. Payroll gains also surprised on the upside over the following two months. Meanwhile, the unemployment rate touched 3.5% in both September and November, the lowest level in five decades. The tight labor market resulted in decent income gains, and investors looked forward to a healthy holiday shopping season. Housing market signals were also generally positive, and the Commerce Department reported in December that permits for new construction surged to their highest level in more than 12 years.
The manufacturing sector remained the weak spot in the aging economic expansion. Stocks fell sharply early in the quarter after the Institute for Supply Management reported that its gauge of U.S. manufacturing activity had fallen further into contraction territory and reached its lowest level since the Great Recession of 2008–2009. Durable goods orders fell unexpectedly in November, and the decline of regional factory indexes into or near contraction territory added to signs of persistent weakness in the sector.
Corporate Earnings Continue to Decline, but Investors Hope for 2020 Rebound
Third‑quarter earnings reports may have given another modest lift to stocks. Although overall earnings for the S&P 500 declined marginally for the third consecutive quarter, according to FactSet, slightly more companies than usual topped analysts’ consensus estimates. While rising wage pressures and input costs seemed to be hurting profit margins, analysts polled by FactSet continued to expect a return to earnings growth in 2020.
In what may be a positive sign for the market and the efficient allocation of capital, T. Rowe Price traders noted that investors seemed to grow more inclined to reward companies for surpassing earnings or revenue estimates and lifting their guidance while punishing those that failed to deliver on either count. Due in part to the growth of index funds and other passive strategies, money has tended to flow in and out of equities as an overall asset class in recent years, causing stock prices to move in tandem.
High Possibility of Extreme Outcomes in 2020
At a recent press briefing in New York, John Linehan, an equity CIO at T. Rowe Price, stated that the long duration of the current bull market is not a particular concern. He observed that, rather than dying of old age, bull markets often succumb to one of four ills: an economic downturn, regulatory or policy uncertainty, Federal Reserve policy errors, or valuation excess. On balance, current signals suggest slightly positive returns for the market in 2020, with a very accommodative Federal Reserve likely to offset significant volatility caused by the regulatory and political environment. Nevertheless, the possibility of extreme outcomes in either a negative or positive direction appears higher than in recent years.
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