It’s been a truly remarkable year for North American stock markets. As 2019 began, everything seemed to be doom and gloom after a December market plunge that saw the S&P 500 drop close to bear market territory by the day before Christmas — bah, humbug!
What a difference a year makes! As I write, all the major U.S. indexes have just hit record highs. Nasdaq is leading the way with a year-to-date gain of 32.8 per cent. The S&P 500 is ahead 27.3 per cent, while the Dow is up just over 21 per cent.
Here at home, the S&P/TSX Composite wasn’t quite as robust, but the gain of 19.1 per cent was certainly respectable.
So, what happened to turn the markets around after the dismal finish in 2018? In my view, three things. All revolve around Donald Trump.
Business-friendly policies. Say what you like about Trump. I find him to be a supersensitive egotist with vicious streak of cruelty. According to the polls most Canadians dislike him.
He doesn’t care. Remember his election slogan: “Make America Great Again.” Not make the world great. Not make North America great. Certainly not make Canada great.
Trump’s focus has been strictly on the United States and finding ways to strengthen its economy. The results speak for themselves. The U.S. unemployment rate in November stood at 3.5 per cent, the lowest since 1969. Some 266,000 jobs were created that month — while Canada was losing more than 71,000 at the same time. Manufacturing jobs have shown a steady increase since Trump’s inauguration in 2017, according to the Bureau of Labor Statistics.
Why is all this happening? Because Trump has pushed through a wave of business-friendly policies, including a big corporate tax cut and the slashing of regulatory red tape. He’s made business respectable again and restored a degree of confidence.
Many people disagree strongly with his policies, most especially with the shredding of environmental protections. But from a purely job creation perspective, they appear to be working.
A trade truce with China. Trump loves using tariffs as a weapon against any policies he doesn’t like. He hammered Canada’s steel and aluminum industry on the ludicrous pretense of “national security” in an effort to stop dumping, mainly from China. Those have since been lifted but earlier this month he did the same to Brazil and Argentina, accusing them of currency manipulation. He’s now threatening to hit French wine and cheeses if that country goes ahead with a digital services tax that would hit U.S. companies such as Facebook and Alphabet (Google).
But the biggest trade battle was with China and that kept stock markets on edge all year. The Bank of Canada went so far as to publish a report detailing the collateral damage an all-out U.S.-China trade war would have on this country.
The announcement this month of a limited “phase one” deal between the two superpowers eased investors’ concerns and paved the way for the latest market rally. It’s not the end of the conflict by any means. But it’s a truce at a crucial time.
His pressure on the Fed. The change in direction at the U.S. Federal Reserve Board played a huge role in revitalizing the markets. The Fed had already raised its rates three times in 2018, but it was the fourth hike of a quarter-point on Dec. 19, and an indication of at least two more to come in 2019, that prompted the Christmas market meltdown.
Trump was furious at the move, lambasting the theoretically independent Open Market Committee for its actions and demanding a rollback. He eventually got it, although it took a few months.
In January, the Fed abruptly changed direction and put rates on hold, effectively admitting it had been wrong about the direction of the U.S. economy. That pause lasted a few months. Then in late July Fed chairman Jerome Powell announced the first of three quarter-point cuts, almost reversing the increases of 2018.
The Washington Post called it a “year of humility” for the central bank.
It appears we’re now in for a prolonged pause, which could last through all of 2020. In its December statement, and comments from Powell, the Fed indicated it is not inclined to take any further action unless something unusual occurs.
Get more business in your inbox
Get the business news and analysis that matters most every morning in our Star Business email newsletter.
Sign Up Now
“The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective,” the statement said.
So, what about 2020? Historically, in the years after the Fed has lowered rates and then paused, stock markets have done well. We’re about to find out if that still holds true. Another strong year for U.S. stocks would go a long way to aiding Trump’s reelection bid — like it or not.