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Stormy Start: Some Worries Fade, Others Emerge

By Kara Murphy

I’ve never been a fan of bold New Year’s resolutions, mostly because they’re hard to keep. By this time of year, many people are already giving up on their vows to eat healthier, exercise more, or spend less, to name a few common resolutions.

  • A spike in tensions between the U.S. and Iran and a viral outbreak in China fanned volatility, especially among China-related assets.
  • Growth of 2.3% last year and a strong labor market put the U.S. economy on solid footing at the start of 2020.
  • The Federal Reserve left rates unchanged in January, taking a wait-and-see approach.

That’s not to say such objectives aren’t worth pursuing. But I’ve always found it easier to stick to specific, modest goals — like getting to the gym twice a week or getting my kids to bed without too many tears being shed, on my part or theirs. Whether we’re talking about dropping a few pounds or building a portfolio, small wins can be the key to staying invested through the inevitable ups and downs of life and the market.

Equity Markets

After finishing 2019 strong, the broad stock market, as measured by the S&P 500 index, fell flat in January as investors grappled with the implications of long-simmering issues, including tensions between the U.S. and Iran, and new headwinds, particularly the coronavirus outbreak in China.

As concerns about the outbreak’s impact on global growth mounted, U.S. equities with exposure to China suffered, falling nearly 5% during the final weeks of January, according to Goldman Sachs Private Wealth Management Investment Strategy Group (“ISG”). U.S. hotel and leisure stocks also turned down owing to concerns about the possible effects of travel bans intended to stem the spread of the virus in China and beyond. While the number of infections continued to rise in early February, the virus remained heavily concentrated in China, home to about 99% of confirmed cases.

This isn’t the first time we’ve seen a viral outbreak fan worries about global growth. Nonetheless, ISG has indicated that the impact of past viral outbreaks on global activity has been modest and has varied by region. Risk assets, such as equities and certain commodities, have tended to trade poorly for roughly four weeks around prior pandemics. But the underperformance of stocks appears temporary and not notable two months after the initial event, according to ISG.


Political uncertainty, which has been brewing for months now, moved to the fore again in January, when President Trump’s Senate impeachment trial began, and Democrats geared up to vote in the first primaries and caucuses of the 2020 presidential election.

While political uncertainty has the potential to create economic-policy uncertainty, last month’s impeachment trial didn’t appear to impact the president’s steady approval ratings or have other major ramifications. President Trump’s approval rating, according to the Real Clear Politics polling average, has been relatively steady throughout his Senate trial, hovering between 44% and 46%, despite the drumbeat of daily news. As was widely expected, the trial resulted in acquittal earlier this month.

What impact might the president’s bid for re-election have on the market? That’s a question on the mind of many investors. It’s useful to look at history as a guide to possible outcomes. ISG finds that average annual S&P 500 price returns have historically been strong (nearly 12%) during the fourth year of first-term presidencies.

Regardless, divided government — where one party controls the presidency and the other controls Congress — doesn’t necessarily bode ill for the market. According to ISG, in non-recessionary periods, U.S. equity returns have been higher when control of the government has been divided. In Outlook 2020: Room for Growth, ISG’s estimate of the risk of recession in the U.S. and Eurozone stood at 20-25%.

U.S. Sectors

Cyclical sectors, which rallied last year, lost ground in January amid concerns over the possible economic effects of the coronavirus outbreak. Energy, Materials and Industrials were among the worst-performing S&P 500 sectors last month. Technology, however, continued its long upward march, gaining 4% in January and about 46% for the trailing 12-month period.

Utilities, a defensive sector, was the strongest of all S&P 500 sectors, returning 6.7% for the month and slightly more than 30% for the one-year period.

Fixed Income

After treading water in December, the bond market staged a comeback last month thanks to strong demand for safe-haven assets. The Bloomberg Barclays U.S. Aggregate Bond Index, a benchmark for the domestic fixed-income market, returned nearly 2% in January. For the trailing, 12-month period ended last month, the index returned slightly more than 9.5%.

Not surprisingly, given uncertainty and volatility in equity markets, Treasurys shined, particularly longer dated 10- and 20-year Treasurys, which returned more than 5% in January and nearly 16% for the trailing, 12-month period. Corporate bonds also outperformed the broader fixed-income market in January and for the trailing, 12-month period.

The Economy and the Fed

Despite market volatility in January, the U.S. economy entered 2020 on solid footing. Growth — as measured by percentage change in gross domestic product (GDP) — increased at a rate of 2.1% in the fourth quarter of last year (as it did the previous quarter) and 2.3% on a year-over-year basis in 2019, according to an initial estimate by the U.S. Department of Commerce.

Although it grew at a modestly slower rate last year than it did the prior year, the economy benefitted from continued record-low unemployment and solid job gains, on average, in recent months. These tailwinds helped to offset the drag created by the long-running U.S.-China trade war and slower growth in such key overseas markets as the Eurozone. (This year, ISG expects global economic activity to be modestly higher than it was last year, driven by a rebound in Brazil, Russia and India, a modest pickup in sequential growth in the Eurozone and partially offset by slower growth in the U.S., China and Japan.)

Although the trade war is far from over, it has receded from the headlines lately thanks to an initial pact that U.S. business leaders have generally hailed as a good first step. The phase-one agreement, first announced in October and signed by President Trump in January, aims to open Chinese markets to more American firms (including financial services companies), boost farm and energy exports and better protect American technology and trade secrets, according to published reports. The U.S. has agreed to reduce some existing tariffs and suspend planned tariffs, yet tariffs remain on roughly $370 billion of Chinese-made goods.

Meanwhile, we’ve begun to see signs that the de-escalation of the trade war and the Federal Reserve’s rate cuts in 2019 are lifting corners of the economy that sagged last year, from housing to manufacturing. In January, the Institute of Supply Management’s manufacturing index returned to expansion territory for the first time since July 2019.

Citing a strong labor market and moderate economic growth in the U.S., the Federal Reserve left interest rates unchanged in January, at its first meeting of the year. The central bank, which also noted that business fixed investment and exports remain weak, is said to be taking a wait-and-see approach before adjusting rates again.

In a statement announcing its decision to leave its benchmark rate unchanged, the Federal Reserve said: “The [Federal Open Market] Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective.”


In the coming weeks and months, we may be tempted to throw in the towel on our New Year’s resolutions, but let’s not also lose sight of our long-term financial goals as the market bounces around, as it inevitably will. So far, I’ve managed to carry out my resolutions — modest as they are — to hit the gym twice a week and to take note on a daily basis of things for which I’m grateful. As for putting my kids to bed sans tears, well, that’s another story.

Live richly and invest well,

Kara Murphy, CFA

Chief Investment Officer

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Economic and market forecasts presented reflect the judgment of Goldman Sachs Investment Strategy Group as of the date of this material and are subject to change without notice. Return expectations are based upon ISG’s capital market assumptions. They should not be taken as an indication or projection of returns of any given investment or strategy. Forecasts are estimated, based upon assumptions, and are subject to significant revision and may change materially as economic and market conditions change. We have not obligation to provide updates or changes to these forecasts.

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Index Definitions

S&P 500 Index: A broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a capitalization-weighted, unmanaged index that is calculated on a total return basis with dividends reinvested. The S&P 500 represents about 75% of the NYSE market capitalization.

Russell 2000 Index: This index measures the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks; the index serves as a benchmark for small-cap U.S. stocks.

MSCI Europe, Australasia, and Far East (EAFE) Index: This index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada.

MSCI Emerging Markets Index: This index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. As of June 2009, the MSCI Emerging Markets Index consisted of the following 22 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

Bloomberg Barclays U.S. Aggregate Bond Index: This is a market capitalization weighted bond index of investment-grade, USD-denominated fixed-income securities.

U.S. High Yield Corporate: The Bloomberg Barclays U.S. Corporate High Yield Bond Index measures the USD-denominated, high-yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded.

U.S. Investment Grade Corporate: The Bloomberg Barclays U.S. Corporate Bond Index measures the investment-grade, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by U.S. and non-U.S. industrial, utility, and financial issuers.

Bloomberg Barclays Municipal Bond Index: The Bloomberg Barclays U.S. Municipal Index covers the USD-denominated, long-term, tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.

S&P 500 GICS Sectors Level-1: In 1999, MSCI and S&P Global developed the Global Industry Classification Standard (GICS) to offer an efficient investment tool to capture the breadth, depth, and evolution of industry sectors. GICS is a four-tiered, hierarchical industry classification system. It consists of 11 sectors, 24 industry groups, 68 industries, and 157 sub-industries. Companies are classified quantitatively and qualitatively. Each company is assigned a single GICS classification at the sub-industry level according to its principal business activity. MSCI and S&P Global use revenues as a key factor in determining a firm’s principal business activity. Earnings and market perception, however, are also recognized as important and relevant information for classification purposes and are considered during the annual review process.

©2020 United Capital Financial Advisers, LLC, a Goldman Sachs Company. All Rights Reserved. 2/2020 / 571566


Kara Murphy

Kara Murphy

United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization.

The information contained herein is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. GS PFM does not provide legal, tax, or accounting advice. Clients should obtain their own independent legal, tax, or accounting advice based on their particular circumstances. Please contact your financial adviser with questions about your specific needs and circumstances.

Information and opinions expressed by individuals other than GS PFM employees do not necessarily reflect the view of GS PFM. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.

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