The Ten Surprises of 2019 worked out plenty well. While we don't go through this process with the objective of getting a high score, knowing that you have been able to anticipate some of the generally unexpected events that are going to influence the financial markets during the coming year is gratifying. The real goal of the Surprises is to stretch our thinking and yours about high-impact investment events over the coming twelve months. The definition of a Surprise is an event which a professional investor would assign a one out of three probability of happening, but which we think is probable, meaning it has a better than 50% of taking place. Usually we get five or six pretty much on target, but last year we did better than that.
In looking back over 2019, the most positive factor was the accommodative monetary policy provided by the United States and other countries, which had a favorable impact on the economy and the financial markets. The most negative factor was the uncertainty created by the lack of resolution of Brexit in the United Kingdom and continued trade tensions between the U.S. and China, which drove down manufacturing activity and held up capital spending throughout the developed world. Even though both conflicts had positive developments in December, these issues are likely to persist next year.
In the first Surprise, we said the Federal Reserve, which had increased rates four times in 2018 (a Surprise we got right that year), would stop raising rates. They actually cut rates three times (a controversial move). Inflation remained subdued, as we suggested, and longer-term interest rates actually came down (we thought they would stay low but not drop as far as they did). The yield curve inverted briefly, but then turned positive, and has remained so through today.
For the second Surprise, we said that the Standard & Poor's 500 would rise 15%. We thought we were showing our optimism by picking a number above the consensus, but we didn't go far enough. At its peak, the index rose close to 30%. The fact that the Fed cut rates three times was an important contributor to the sharp appreciation. Ample liquidity fueled the move. Earnings did not improve significantly; rather, multiple expansion resulting from lower rates was the key factor in the market's performance.
For the third Surprise, we said that capital spending and housing would be disappointing as economic drivers during the year. The economy would have to depend on the consumer and government spending. The consumer really came through, but government spending, which resulted in a near-trillion dollar deficit, was a factor as well. While many observers were concerned that the poor market performance during the fourth quarter of 2018 was a precursor to a recession in 2019 or 2020, we thought that the next recession would be in 2021 or later. We considered it unlikely that we would experience a serious downturn in an election year. The economic indicators we were looking at suggested that growth of about 2% would persist throughout 2019.
In the fourth Surprise, we thought 2019 would be a tough year for gold. Since we expected both the stock and bond markets to do well, we thought investors would turn away from gold, which had a cost to carry and no return. As a result of global political uncertainty and a cloudy economic outlook, gold had a good year along with the financial markets, and we got this one wrong.