Happy New Year and we hope you have had a festive season. 2019 saw a sharp rebound from just a year ago. We have had volatile swings this year, but the markets have ended at all-time highs and marked the end of one of the best investment decades. Specifically, the fourth quarter has been a bright one for the U.S. markets, with a variety of positive outputs in the realms of trade, earnings and economic indicators. The quarter had some head winds to overcome in tactical trade negotiation between Presidents Trump and Xi, to the heating up of the election campaign in the Democratic Party, and the formal impeachment inquiry regarding President Trump. However, the markets marched higher with strong domestic fundamentals driven by low unemployment, strong consumer spending and low inflation. We believe these trends will continue to support a strong start to 2020 for the equity markets.
The development of the U.S-China Phase One Trade Agreement in early December sent equity markets to record highs. Tariffs at 15% on $156 billion worth of Chinese imports have been cancelled which were set to take effect on December 15th. This development dampened the biggest headwind facing the global economy, as the two countries outlined how to trade in the coming years. This is a large benefit for both economies and the equity markets responded in kind.
China has tentatively agreed to purchase an expected $40 billion dollars of U.S. agricultural products which include soybeans, grains, and pork. This will come as a huge relief for the US farmers who have suffered as much as any group since the trade war began. In addition, China has also agreed to reduce tariffs on more than 850 goods come January 1. Furthermore, tariffs on another $120 billion worth of goods are to be cut to 7.5% once the deal is signed. The two countries are expected to hold a deal-signing ceremony on January 15, 2020.
This Phase One deal timing is seen as a Christmas gift to the markets and Phase Two negotiations are expected to commence immediately.
The most recent jobs report declared jobs added in November were up 266,000, beating consensus expectations of 187,000 as per economists. Unemployment remained at 3.5%. Inflation, according to the CPI, was up 2.1% for the twelve months ending in November 2019. The Federal Reserve has recently reiterated its pausing stance on monetary policy, citing that it would take a material change in the economy for the Fed to recommence rate adjustments.
As a result, consumers are gaining confidence, translating into the heavier spending that was reflected in record holiday sales. This should drive corporate earnings announcements for the fourth quarter through January 2020.
In Brexit news, Prime Minister Boris Johnson won the general election in definitive fashion and has had his Withdrawal Agreement Bill passed by MPs in British Parliament. The deal now needs to get a greenlight by the EU and the British will be set to leave the EU on January 31, 2020. Tariffs will be negotiated during the transition period which would end on December 31, 2020.
The U.S. economy is robust with low interest rates, an accommodating Fed, low inflation, a strong job market, modest GDP growth, strong consumer confidence and growing business confidence, which bodes well heading into 2020. The markets should have a steady path in response to good economic news through February until Super Tuesday when the Democratic nominee becomes clear. The second quarter through the middle part of the fourth quarter will act in response to a fiery Presidential campaign. However, we believe the markets will resolve to the upside towards the end of the year.
We hope you have had a wonderful holiday period with family and friends, and as always, please do not hesitate to contact us with any questions, concerns, or to schedule a review of accounts. Happy New Year!