Note: This market review was published on January 14th, 2020 and may not be reflective of current market or investing issues.
In contrast to major lows at year end 2018, the end of 2019 saw major U.S. indices at or near record highs. The fourth quarter saw much lower volatility than the middle of the year as the markets continued mostly higher with only a few minor pullbacks along the way. Many of the risks that were influencing markets throughout the year are still relevant today; however, most of them have shown signs of moving toward a resolution. There have been more negotiations in the U.S.-China trade war, and they are finally showing signs of progress, tensions in the Middle East seemed to have peaked for now, and the latest deadline for Brexit is less than a month away.
In their fourth quarter meeting, the U.S. Federal Reserve stopped the interest rate easing cycle, for now, and left their benchmark rate alone following three consecutive cuts during the year. The future path for the Fed is still in question however. Chairman Powell has said that the three cuts during the year were simply a mid-cycle correction to interest rates and do not point to a long-term easing cycle. Although the Fed has stopped their interest rate cuts for now, they have been forced to continue to increase their balance sheet through an asset purchase program in order to continue to provide liquidity to overnight lending markets. While it continues to be talked about as a short-term issue, there has been continuous intervention through the fourth quarter and plans to halt the asset purchases have continued to be delayed.
The trade war between the U.S. and China is finally starting to show progress and talks are finally starting to look like they could bring results over the coming months. The first phase of the deal has been verbally agreed to and is expected to be signed in mid-January. While many details of the first phase have not been shared publicly, it is expected to include China increasing purchases of U.S. agricultural products and increasing intellectual property protections, while the US is likely to end any tariff increase. That said, phase two of a long-term deal could be years away.
Geopolitical tensions continue to be a threat. Protests in Hong Kong have continued throughout the past few months, despite the government removing the controversial extradition bill that provided the initial spark for the protesters. While the first of the protester’s five major demands has been met, in the removal of the bill, the remaining four have seen little interest from the government. In the Middle East, following U.S. airstrikes on Iranian-backed rebels, protesters occupied the Green Zone in Iraq and were able to break into the compound surrounding the U.S. Embassy. While the situation de-escalated after a few days, the United States then killed Iranian General Qassem Soleimani, to which the Iranian military responded by launching rockets at bases in Iraq that house American troops. While there were no casualties reported in the attack, it showed that Iran is willing to use military force if they deem it necessary. This has been reported as the end of the retaliation from Iran and both sides seem to be standing down, for now. Over the next few months global growth could begin to rebound off of recent lows due to the stimulus that has been provided over the past year. This growth will likely be supportive of risk assets over the next quarter, with international markets expecting out-performance relative to the United States as the dollar begins to weaken. While a recession in the United States continues to be a threat, one is not expected during the first three to six months of 2020 unless there is a significant unforeseen event.
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