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Stocks set to close the year with best returns since 2013

Posted at 9:14 AM, Dec 31, 2019
and last updated 2019-12-31 11:22:34-05

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

The benchmark S&P 500 is on pace to finish 2019 up more than 28% — that would make it the strongest annual gain for stocks since 2013. Driven by the strong performance of technology stocks, the Nasdaq has risen 35% this year, while the Dow listing of blue-chips has added 22%.

Of late, investors have been cheered by a truce in the 17-month U.S.-China trade war and positive signs for the American economy. Fears about a possible recession have also faded since the summer after the Federal Reserve cut interest rates three times. The central bank appears set to keep them low for the near future.

Goldman Sachs analysts 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."

Economic reports

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.