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Economy  | December 31, 2019

The US-China trade war was the biggest driver for stocks this year. Before Washington and Beijing agreed a preliminary trade deal, investors got whiplash from headlines about the tense negotiations.

Anxiety about deteriorating trade relations also showed up in economic data this year, which led the Federal Reserve to cut interest rates three times this year to boost the economy.

All this left its mark on the stock market.

January 10: The best day of the year

Stocks peaked early in 2019. The biggest rally happened on just the fourth trading day of the year, when the S&P 500 (SPX) jumped 3.4%. The Dow (INDU) also recorded its biggest jump of the year that day, rallying nearly 750 points, or 3.3%.

Three factors sparked the rally that day: The jobs report for December came in better than expected, China took action to stimulate its slowing economy, and Federal Reserve Chairman Jerome Powell said the central bank was flexible regarding futures interest rate hikes. The Fed raised rates nine times between 2015 and 2018, but lower rates are better for stocks.

The Fed's December 2018 rate increase would be its last for at least a year.

The boost at the start of the year gave stocks a head start to rally to their best January in 30 years. The S&P 500 and the Dow climbed more than 7% on the month, marking their best performance since the late 1980s.

May 10: Trade fears take hold

May marked the month when trade worries became very real for investors. US hiked import tariffs on $200 billion worth of Chinese goods to 25% at the beginning of the month, and China threatened to retaliate.

Stocks swung wildly on May 10, starting the day lower but retraced their losses after Treasury Secretary Steven Mnuchin and Trump called the trade talks with China "constructive." Nevertheless, it was one of the worst weeks for US equities of the year.

June 4: Fed in shining armor

Stocks logged their second-best day of the year on June 4, as Fed Chairman Powell hinted that an interest rate cut could be coming. As the escalating trade war began to weigh on the economic outlook, Powell said the central bank would "act as appropriate to sustain the expansion."

The Fed cut rates for the first time since the financial crisis at the end of July and would go on to lower rates twice more in 2019.

August 23: Trade whiplash

August was all about the trade war as the rhetoric between Beijing and Washington grew harsher. Stocks logged their biggest swing of the year on August 23, because of a sell-off driven by Trump's response to China's retaliatory tariffs on American imports, including oil.

In one of his tweets, the president wrote "we don't need China and, frankly, would be far better off without them."

Stocks slumped, oil prices dropped more than 2% and the US Treasury yield curve inverted, so that 2-year bonds yielded more than 10-year bonds. Historically, an inverted yield curve has signaled a recession.

Although recession fears abated toward the end of the year, the tariff tit for tat and yield curve inversion sparked concerns about the health of the US economy going into 2020.

December 13: Phase one

After a year of trade-related turbulence, China and the United States confirmed they reached a "phase one" trade agreement on December 13, which avoided further escalation of tariffs.

The countries had initially reached a preliminary deal in mid-October, but it never got signed and tensions flared up again in the following weeks.

But stocks December 13 ended more or less flat. Over the year, investors have grown weary of the carrot and stock approach to trade negotiations. Many believe that unless pen hits paper, a trade agreement is not worth very much.

But even with the choppy trading days of 2019, stocks logged strong gains this year, allowing them to soar to all-time highs again. On December 13, for example, the Dow and the S&P 500 set a new record closing high even though the excitement about the preliminary trade deal was limited.

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