Markets Steam Ahead as Clouds Lift

Global stock markets rallied in the decade’s final quarter with nearly identical 9% gains in the U.S., Europe and Asia. For the full year, U.S., stocks held a slight edge, with the S&P 500 advancing 31%, while the Dow, mid-cap and small-cap indexes all gained roughly 25%. Despite the year’s huge gains, stocks generally didn’t recover 2018’s losses until the fourth quarter, after the U.S. and China agreed to a “phase one” trade deal, and following Boris Johnson’s resounding electoral victory in the U.K. Stocks were not alone in celebrating 2019. In a sharp reversal from last year, every major asset class produced positive returns, including bonds, gold and real estate.

Given how much of a headwind the uncertainty surrounding trade wars and Brexit had posed for markets, a positive reaction to these developments was to be expected. Whether the magnitude of that reaction is justified depends very much on whether progress proves substantial and enduring, or hollow and fleeting. Critical details are lacking from both pacts. China’s initial commitments include increasing purchases of certain American goods and services, and decreasing pressure on foreign companies to transfer their technology. But these commitments may prove difficult to measure and harder to enforce. For the time being, the tariffs imposed in September are being rolled back, while leaving the vast majority of pre-September tariffs in place, pending a “phase two” deal that no one believes is imminent.

As for the U.K., it has less than a year to negotiate an entirely new trade agreement with the European Union– achievements that took five years with Japan and Canada, both decidedly less significant trading partners. And no one has figured out how Ireland and Northern Ireland are to be in two separate customs regimes without implementing the hard border that no one wants.

Most likely, these deficiencies won’t derail either accord in 2020. With an election looming, President Trump has a powerful reason to declare victory, whether or not any real progress is being made with China. The U.K. and European Union will remain in a transition period through the end of the year, ensuring that the practicality of their arrangements will not be tested until next year, at the earliest.

Yet another market reversal, therefore, will likely require a new catalyst in 2020. Right on cue, the New Year greets us with rising tensions between America and Iran. While this bears watching, of course, history tells us that the risks we fear most, often never materialize, and those that do are usually the ones we don’t expect. That fact has always made it foolhardy to let geopolitics dictate investment strategy. Hopefully, we will remember that throughout what is certain to be an eventful 2020.

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