Week In Review 12.20.2019

What a difference a year makes. A year ago, recession fears gripped the markets, the Federal Reserve had just raised rates for the fourth time in 2018, the federal government was mired in what would become the longest shutdown on record, and the S&P 500 was headed towards its worst December since 1931. A year later, the S&P 500 is at all time highs, on pace for its best year since 2013, and recession fears have faded.So what happened? How did we seemingly go from the brink of recession and a bear market to record highs in equity markets? Part of the answer lies in the fact that the recession that many feared never materialized. In early January, the Federal Reserve switched monetary policy from “autopilot” to a more “flexible” approach, brining a sigh of relief from the markets. The end to the government shutdown also aided optimism. Finally, despite a number of ups and downs, U.S./China trade talks progressed to the point where the two countries now appear poised to sign a “Phase One” trade deal, confirming investors’ long held belief that both countries would ultimately act in their economic self-interest.

So what is in store for 2020? Trade will likely continue to dominate headlines. Assuming the U.S. and China finalize the “Phase One” deal, investors will then naturally expect to see progress towards a “Phase Two” deal. Ongoing Brexit negotiations could create some volatility, as the UK looks to finalize its exit from the EU. Monetary policy should be relatively benign, at least in the near-term, as both the Fed and ECB have indicated they are unlikely to raise rates in the absence of a meaningful acceleration in inflation. Finally, given that 2020 is an election year, volatility could be elevated as November draws closer, depending on polling data and the policy proposals of the different candidates.