A year ago, the baseline scenario for the economy was moderate growth, but with an elevated level on uncertainty, with risks skewed to the downside. Trade policy uncertainty and slower global growth were dampening factors, but Fed policy was supportive. Investors were willing to look beyond the uncertainty. This year, trade policy is still uncertain, but less so, and the global economy appears poised for improvement. However, there’s a Senate impeachment trial pending, it’s a presidential election year with many unfriendly market themes, and geopolitical tensions have just escalated.

Economic data reports were less market-moving in 2019, as investors focused on the trade policy and the Fed. On a day-to-day basis, stocks tended to rise on news suggesting progress on a trade deal and fell on news of an impasse. The Phase 1 deal with China halts the escalation in trade tensions, prevents the implementation of the final round of tariffs on Chinese goods (mostly consumer goods), and partly unwinds the round of tariffs imposed in September. However, the agreement falls far short of taking us back to where we were. Still, for the financial markets, the absence of bad news is good news.

A year ago, the Fed was expected to raise rates once or twice in 2019. The stock market declined in late 2018, but began to recover at the start of 2019 after Chair Powell said that the Fed was “listening carefully, with sensitivity to the message that the markets are sending and we’ll be taking those downside risks into account as we make policy going forward.” After the FOMC meeting in late January, Powell said that “the case for raising rates has weakened somewhat.” By the middle of last year, the policy outlook had shifted, but rather than signaling the start of a lengthy easing cycle, Powell called it a “mid-cycle adjustment.” The Fed still saw the federal funds target range below the natural rate (that is, below a “normal” level), but felt that it was important to provide insurance against the downside risks from slower global growth and trade policy uncertainty. After lowering short-term interest rates three times, the Fed left rates unchanged in December, believing that “the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the symmetric 2% objective”

– and the markets were okay with that. Monetary policy is expected to remain on hold in 2020, but the Fed will respond to a material change in the economic outlook should that occur.