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Stocks close the year with best returns since 2013

The U.S. stock market closed 2019 on a high note after a topsy-turvy year marked by bitter trade fights and recession jitters.

The S&P 500 finished with a gain of 28.9% for the year, its best annual performance since 2013, while the Dow gained 22.3%, led by Apple. Technology stocks led the way higher, vaulting 48%. That helped power the Nasdaq to a 35.3% gain for the year.

"We had a remarkable year of returns in the stock market," said Keith Buchanan, portfolio manager at Globalt Investments. "Things are much different going into 2020 than they were going into 2019."

Fed by the Fed

The market got off to a roaring start in January after Federal Reserve Chairman Jay Powell said the central bank would be "patient" with its interest rate policy following four increases in 2018. That encouraged investors who had been worried the Fed would continue hiking rates. Those concerns helped fuel a sell-off in the final quarter of 2018 that knocked the S&P 500 nearly 20% lower by December of that year.

January's rally helped set the tone for a year in which the market responded to every downturn with a more sustained upswing. Along the way, stocks kept setting records — 35 of them for the S&P 500 index, 22 for the Dow and 31 for the Nasdaq.

"You fast-forward 12 months and now we're going into 2020 and the sentiment seems like it's fairly the opposite," Buchanan said. "There are fairly rosy expectations and there's not a consensus that a recession is coming in a very near term."

By the end of the year, the Fed had completely reversed course and cut rates three times in what Powell called a pre-emptive move against any impact a sluggish global economy and the U.S.-China trade war might have on U.S. economic growth.

What recession?

The market also overcame a late-summer slump caused by fears that the U.S. economy could be headed for a recession. Those concerns eased as investors drew encouragement from surprisingly good third-quarter corporate earnings and data showing the economy was not slowing as much as economists had feared. Of late, investors have been cheered by a truce in the 17-month U.S.-China trade war

Goldman Sachs analysts now put the odds of a recession in the next year at roughly 20%, citing the healthy U.S labor market, muted inflation, healthy corporate profits and the absence of evident financial bubbles.

"With job creation still running at roughly double its breakeven pace and growth likely to remain above trend next year, we expect the unemployment rate to decline to 3.25% in 2020, the lowest rate since the Korean War," they told investors in a recent report.

Riding high

For now, those and other positive signs have markets riding high. The S&P 500 has risen five straight weeks, notching multiple all-time highs along the way. It's on track to end December with its fourth consecutive monthly gain.

Still, as the market prepares to close out a strong year of gains, uncertainty remains over the final details of a "Phase 1" trade deal between Washington and Beijing, which U.S. officials say will be signed in early January. Details of the agreement have not been disclosed, and it's unclear how much impact it will have if the two sides are unable to resolve their remaining differences.

Questions also remain about the health of the U.S. manufacturing sector, which has been hurt by the Trump administration's trade war with China.

"While (manufacturing) only represents about 12% of the economy, it tends to be much more of a leading indicator versus the services sector," said Randy Frederick, vice president of trading & derivatives at Charles Schwab. "And it's been one of the things that's been causing those out there who think we still might be seeing a recession at some point soon to worry."

A hotter economy?

A couple of potentially market-moving economic reports are scheduled for release this week.

Investors will get to mull over new data on U.S. consumer confidence and home prices Tuesday, and the latest snapshot of manufacturing on Friday. Meanwhile, the minutes of the Federal Reserve's latest interest rate policy meeting are also due out on Friday.

The reports are likely to reinforce the idea of a "not-too-hot, not-too-cold economy entering 2020," wrote David Kelly, chief global strategist at JPMorgan Funds, in a research note. 

"Consumer spending still looks well supported and, even as the impact of tax cuts continues to fade, global manufacturing should see some bounce back, reflecting, in part, a clearer path on Brexit and a 'Phase One' deal between China and the United States," he noted.

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