Q4 2019’s strong performance has spilled into 2020.
Drivers of bullish sentiment include—
- Recession fears have subsided, and the economy is expanding.
- The yield curve is no longer inverted.
- The Fed is in no hurry to raise interest rates this year, and it has been buying Treasury bonds, i.e., QE-lite.
- There are signs that global growth, which slowed last year, is stabilizing.
- A ‘skinny’ trade deal with China will be signed on January 15.
- Corporate stock buybacks have moderated but remain at high levels.
What might derail bullish sentiment?
In the past, chaos in the Middle East barreled into the price of oil. In August 1990, Iraq’s invasion of Kuwait lit a fire under crude prices. Adjusted for inflation, the price of oil nearly doubled.
Since October 8, 2019, the S&P 500 Index2 is up nearly 13% through its latest high on January 2 (St. Louis Federal Reserve).
- That’s an astounding run over a very short period.
- Perfection can get priced into the market, and unexpected events may create a reason for short-term traders to take profits.
On Friday, investors reacted to an unexpected geopolitical event.
- The U.S. military killed an Iranian general, creating fears of a much wider conflict.
Thus far, reaction in the market has been muted.
- Neither side wants a full-blown war, and investors have responded cautiously. Yet, the situation remains fluid and miscalculations by either side are possible.
The decade began under a dark cloud. The U.S. was climbing out of the Great Recession, and many wondered whether the economy might flounder for years. However, as investment legend Warren Buffett likes to say, “Never bet against America.”
The economy exited the Great Recession in July 2009 (NBER). As of July 2019, the expansion became the longest on record. The unemployment rate ended 2009 at 9.9% and fell to 3.5% as of November 2019. Over the same period, 22.4 million jobs were created (St. Louis Federal Reserve).
The S&P 500 Index3 bottomed on March 6, 2009 at 676.53, closed at 1,115.10 on December 31, 2009. Ten years later, it finished the decade at 3,230.78. Figure 1 provides a graphic illustration of the long-running bull market.