We hope everyone had a healthy and happy holiday season.

2019 culminated a decade of strong returns for US equity markets. After a disappointing 20% correction in the 2018 fourth quarter, the Dow ended 2019 with a 22.3% gain, its best performance since 2017. The S&P 500 enjoyed its best year since 2013, gaining 28.9%.  Looking forward to 2020 the majority of forecasters agree there is little expectation of a U.S. recession, however growth is expected be slower than 2019.

Clients have requested three major discussions topics to kick off our initial 2020 newsletter:  (1) trade war and the implication to tariffs (2) the 2020 U.S. election year and (3) The Fed, interest rates and valuations.

TRADE DEALS

U.S./China

January 15th is the current deadline for signing Phase One of a U.S.–China trade agreement.  The two countries reached a limited trade deal on December 13, 2019.  The biggest components of Phase One calls for China to buy $40 billion to $50 billion worth of U.S. agricultural products annually and a total of $200 billion of U.S goods over two years.  The announced Phase One agreement propelled equity markets higher through the end of the year and into January of 2020.  Signing of the trade agreement on Wednesday will ease the 18-month trade war tensions aimed at altering China’s trade and economic practices, but will leave in place tariffs on about $370 billion worth of Chinese imports.  The remaining tariffs are expected to be addressed in Phase Two negotiations which will cover issues not included in Phase One, such as Beijing’s heavy subsidies to Chinese state-owned enterprises and restrictions on digital trade and cybersecurity issues.

United States-Mexico-Canada Agreement

USMCA trade agreement renegotiates the NAFTA trilateral deal signed in 1994 and is nearing final congressional approval.

 

Some of the key features of the new agreement are:

  • Creating a more level playing field for American workers, including improved rules of origin for automobiles, trucks, other products, and disciplines on currency manipulation.
  • Benefiting American farmers, ranchers, and agribusinesses by modernizing and strengthening food and agriculture trade in North America.
  • Supporting a 21st Century economy through new protections for U.S. intellectual property, and ensuring opportunities for trade in U.S. services.
  • New chapters covering Digital Trade, Anticorruption, and Good Regulatory Practices, as well as a chapter devoted to ensuring that Small and Medium Sized Enterprises benefit from the Agreement.

The USMCA improves access for US agricultural goods, including dairy products, which Canada in particular had tried to limit.

While 2019 proved to be an exceptional year for equities, there was always a cloud of uncertainty over the markets as a result of trade tensions.  The signing and adoption of both the US/China and USMCA trade agreements will ease those trade tensions going forward.  Since markets do not like uncertainty, these trade resolutions should reduce equity market volatility in the future.  Reduced trade tensions should ultimately strengthen global growth, thereby strengthening both domestic and international equity markets.

2020 U.S. ELECTION YEAR 

While the uncertainty of an election year results may cause some concerns, it should be noted that the stock market normally rises in an election year, no matter which party claims the presidency.  Since WWII, the S&P 500 index has made gains in 78% of elections years with an average increase of 6%.

Interest Rates and Valuations

The Federal Reserve cut interest rates three times from July through October in 2019 and signaled no further cuts in the near term.  This is positive news for both stocks and bonds.

As of today, S&P500 companies are expected to grow earnings 15% in 2020, to 161.86.  This implies a PE ratio of 20.3 times 2020 earnings, slightly above the historical average of 17.3 times.  A friendly Fed makes stock valuations attractive relative to bonds and cash.

Haven Wealth is excited about the investment landscape for the new decade.   We believe that an end to the trade war, an accommodative Fed, and reduced election uncertainty may create a positive backdrop for equity markets in 2020.  In this environment, we anticipate remaining fully invested. As things progress, we will try to keep you updated with recurring newsletters.

We rely on your feedback and questions to help us select topics for future newsletters.  Please feel to contact us with any questions, concerns or meeting requests.

Best,

The Haven Wealth Group Staff


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