December 28, 2019

Stocks Are on the Verge of the Best Year Since 1997
The world is enmeshed in a trade war. The president has been impeached. The tech industry is under attack from regulators worldwide.But this year investors said: So what?The stock market is closing in on its best year in two decades. With only two days of trading to go, the S&P 500 could fare better than it has since 1997. Stock prices have been buoyed by a mere whiff of optimism that the economy -- despite occasional hiccups and dire prognostications by so-called experts -- will keep chugging along.And the Federal Reserve deserves credit, too, for cutting interest rates despite scowls from a White House that wanted more.So far this year, the S&P is up 29%. But the market crept up gradually as investors felt their way through the turbulent year, interrupted only by a handful of short-lived retreats. Since mid-October, stocks haven't had a single daily gain of more than 1%. Even on Friday, the increase was tiny, but it left the index at a record and capped a fifth consecutive week of gains.Through the uncertainty, investors saw things they liked: Job growth continued, U.S. consumers kept spending, and President Donald Trump's bluster about the trade war eventually gave way to promises for an early-stage deal with China.The damage the trade war might cause was the biggest concern for both investors and the Fed this year. The central bank cut interest rates three times to protect the economy. By December, several key measurements of growth suggested that a recession in the United States was unlikely to ruin the party anytime soon. Major U.S. companies reported that their profits continued to grow, and even the tech industry showed resilience in the face of multiple attacks from presidential candidates and Congress.Still, stock market analysts are warning against outright exuberance. The forces that lifted stocks this year might fade, and investors will face a new set of risks in 2020 -- namely that the long-running expansion of the job market could end and corporate profits could start to fall short of expectations. All good business cycles come to an end, and there's always a recession somewhere around the corner."There's the feeling that everything's coming up roses," said Patrick Chovanec, chief strategist at Silvercrest Asset Management. "I think that once we get into the new year and we look at some of these numbers, particularly earnings, whether that bears out is another story."Next year, the United States and China will plunge into a new round of trade negotiations that promise to be no less contentious than the last. The Fed doesn't expect to keep cutting rates, and by the end of 2020 it may even raise them.Companies aren't likely to keep hiring new workers at the same pace. And some of the weaker ones that have borrowed heavily while rates are low might even start to show signs of financial distress."The Fed's interest rate policy has led to an increase in the debt companies and households are willing to take on," said Paul Christopher, head of global market strategy for the Wells Fargo Investment Institute.Some smaller companies, he said, are already struggling to manage their debt. Retailers, small drugmakers and energy companies are having a hard time borrowing more money, because lenders no longer think they're healthy enough to take on more debt."As that group of sectors and companies continues to widen, you could get a sudden stop in lending where liquidity problems are then solvency problems, and then companies have to start letting people go," Christopher said. In addition, stocks have risen so much in the past year that many of them might just be too expensive now.Share prices aren't based only on a general set of feelings in the marketplace. Investors look at what a company might earn in the future, how much debt it has taken on and how much extra cash it is likely to be able to distribute to its shareholders. While corporate earnings growth was strong after the 2017 tax cuts freed up mountains of cash, it may start to slow.One strategist, King Lip of Baker Avenue Asset Management, said he planned to look abroad next year. Foreign companies' stocks aren't nearly as expensive and in many cases their performance is the same or better than their U.S. counterparts, Lip said.Back in the United States, he added, "I wouldn't be surprised to see a lot more volatility."Much will depend on what happens with technology stocks. Because of their sheer size, companies such as Apple, Microsoft and Amazon have the biggest impact on Wall Street indexes like the S&P 500. In 2019 they became the stocks to own as investors sought a safe place to wait out the trade war and potential economic slowdown.Apple is up about 84% this year, its best performance in a decade and a gain that has left it valued at $1.3 trillion. Amazon shares have risen 24% and Microsoft 57%.By the close of trading on Friday, the S&P 500 was up 29.3% for the year. If it ends higher than 29.6% on Tuesday, this will be the best year for stocks since 1997, when the gain was 31%.This year's rally started at a point of weakness. In 2018, the S&P fell 6%. The declines, mostly late last year, weren't enough to kill the decadelong bull market. Instead, along with the Fed's signal that it would cut interest rates, rather than increase them as it had in 2018, they seemed to whet investors' appetites.American consumers never backed away this year, even when companies did. Consumer spending kept the economy afloat. If 2020 is to be another great year for stocks, it will almost certainly be because U.S. spenders -- rather than U.S. companies -- maintain their robust activity."No matter what happens with tariffs, no matter what happens with investment by firms that might be inclined to wait to see what happens to the tariffs, the consumer continues to carry the water in this economy," Christopher said. "The consumer looks pretty darn solid to us."This article originally appeared in The New York Times.(C) 2019 The New York Times Company
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