Stocks are on verge of the best year since 1997

The stock market is closing in on its best year in over two decades, driven by the Federal Reserve’s interest rate cuts and a betterthanexpected showing by the economy. With only two trading days to go, the S&P 500 could fare better than any year since 1997, when it rose 31%. So far this year, it is up 29%. But the rise has been gradual. Since midOctober, it has crept higher at a rate of less than 1% each day, interrupted only by a handful of shortlived retreats.

Overall, investors who bought stocks at higher and higher prices were reacting to good news about the economy and the prospects for global trade: Job growth continued, U.S. consumers kept spending, and President Trump’s bluster about the trade war eventually gave way to promises for an earlystage deal with China. The damage the trade war might cause was the biggest concern for

both investors and the Fed this year. The central bank cut interest rates three times to protect the economy, and by December several measurements of growth suggested that a recession in the United States was unlikely. Major U.S. companies reported that their profits continued to grow, with some industries like tech showing resilience in the face of multiple risks to their business.

But stock market analysts are warning against outright exuberance. The forces that lifted stocks this year might fade, and investors face a new set of risks in 2020 — namely that the longrunning expansion of the job market could end and corporate profits could start to fall short of expectations now reflected in stock prices.

“There’s the feeling that everything’s coming up roses,” said Patrick Chovanec, chief strategist at Silvercrest Asset Management. “I think that once we get into the new year and we look at some of these numbers, particularly earnings, whether that bears out is another story.”

Next year, the United States and China will plunge into a new round of trade negotiations that promise to be no less contentious than the last. The Fed doesn’t expect to keep cutting rates, and by the end of 2020 it may even raise them.

Companies aren’t likely to keep hiring at the same pace. And some of the weaker ones that have borrowed heavily while rates are low might even start to show signs of financial distress.

“The Fed’s interest rate policy has led to an increase in the debt companies and households are willing to take on,” said Paul Christopher, head of global market strategy for the Wells Fargo Investment Institute.

Some smaller companies, he said, are already struggling with debt. Retailers, small drugmakers and energy companies are having a hard time borrowing more money because lenders no longer think they’re healthy enough to take on more debt.

“As that group of sectors and companies continues to widen, you could get a sudden stop in lending where liquidity problems are then solvency problems, and then companies have to start letting people go,” Christopher said. In addition, stocks have risen so much in the past year that many of them might just be too expensive now.

Share prices aren’t based only on a general set of feelings in the marketplace. Investors look at what a company might earn in the future, how much debt it has taken on and how much extra cash it is likely to be able to distribute to its shareholders.

One strategist, King Lip of Baker Avenue Asset Management, said he plans to look abroad next year. Foreign companies’ stocks aren’t nearly as expensive and in many cases their performance is the same or better than their American counterparts, Lip said.

Back in the United States, he added, “I wouldn’t be surprised to see a lot more volatility.”

Much will depend on what happens with technology stocks. Because of their sheer size, companies such as Apple, Microsoft and Amazon have the biggest impact on Wall Street indexes like the S&P 500. In 2019 they became the stocks to own as investors sought a safe place to wait out the trade war and potential economic slowdown. Apple is up about 84% this year, its best performance in a decade and a gain that has left it valued at $1.3 trillion. Amazon shares have risen 25% and Microsoft 56%.