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Wall Street has been undergoing a radical change of mind.

After worrying last year that a recession was around the corner at a time of lackluster economic and earnings growth, many traders entered 2020 with a new conviction: that a revival was around the corner, despite the same lackluster economic and earnings growth.

Abrupt end-of-year attitude adjustments are becoming a habit on Wall Street. A year ago the, Federal Reserve had to curtail interest rate increases when traders sent stocks into a tailspin.

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Despite some scares — like a sudden heightening of tensions with Iran and the impeachment of President Donald Trump — there have been no tailspins in the markets lately. And, in fact, markets surged in mid-January, as trade tensions between the United States and China ebbed.

The S&P 500 rose 8.5% in the fourth quarter, giving it a 28.9% gain for the year.

The recent upbeat reappraisal has been driven not by meaningful change in economic developments but by a surge in confidence driven largely by vague declarations from Washington. The Fed announced in mid-October that it was resuming asset purchases, even as it signaled that there would be no interest rate cuts this year.

Two months later, Trump issued a statement that a so-called Phase 1 agreement had been reached with China to resolve — or at least limit the intensity of — the countries’ trade dispute. Trump signed that agreement Wednesday, keeping the stock market rally going, though more needs to be done to resolve the underlying conflict.

While the pact included benefits for both sides, it also maintained most of Trump’s $360 billion of tariffs on Chinese goods, as well as the threat of additional punishment for China.

The outlook for financial markets is likely to hinge on whether events live up to the hope inspired by the rhetoric, assuming the rhetoric means what investors think it does. And, of course, that new conflicts don’t puncture the good feelings.

“Animal spirits have shifted from pessimism to full-throttled optimism,” said Komal Sri-Kumar, president of Sri-Kumar Global Strategies. “There are quite a few unknowns in the picture, and markets have ignored all of them and surged ahead.”

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Fed policy is an underappreciated uncertainty, he said. Sri-Kumar is not convinced that growth will be strong enough for interest rate cuts to be taken off the table.

“When they say they’re going to stand pat in 2020, I don’t have any reason to believe them,” he said.

Investors may be ignoring such unknowns but also some important knowns. A couple that Sri-Kumar mentioned are stagnant wages and a recession across U.S. manufacturing industries.

Thomas Atteberry, co-manager of the FPA New Income fund, is another growth skeptic.

“Stocks are a leading indicator,” so the rally “is telling you things are getting better,” he said. “But I don’t see earnings or economic data telling me we’re going to have a significant reversal of fortune.”

James Stack, editor of the InvesTech Research investment newsletter, is similarly perturbed by signs of persistent lethargy. He pointed out in a recent issue that the index of leading economic indicators, a widely followed measure that bundles several pieces of data believed to predict economic activity, has been stagnant for more than a year, bringing it “worryingly close,” he said, to a reading that might herald a recession.

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It may seem as though investors are too positive today, but Kate Moore, head of thematic strategy for the global allocation team at BlackRock, said instead that they were too negative yesterday.

“We think in general the market had become far too pessimistic,” she said. “A few months ago, coming out of the summer, when everyone was increasing recession probabilities and calling for the end of the world, we were adding risk. We thought the market was misreading the potential for a meaningful slowdown.”

Bond traders certainly seem eager to front-run an economic resurgence. After falling as low as 1.47% around the start of September, yields on 10-year Treasury issues reversed course, rising to 1.92% on Dec. 31 and depressing bond prices. The average long-term government-bond fund lost 4.7% in the fourth quarter, according to Morningstar, but the sharp decline in yields before that gave the funds a 14.7% gain for the full year.

Portfolios that hold high-yield bonds, which tend to excel when economic growth is solid, rose 2.5% for the quarter and 13.1% for all of 2019. Bond funds in general were up 1.2% for the quarter and 9.1% for the year.

Like stocks, bonds “have baked in a lot of good news that they’re probably not going to get in the next 12 months,” Atteberry said.

While waiting for signs that the U.S. economy will catch up to expectations, some investment advisers are highlighting significant developments overseas that could make foreign markets more fruitful destinations. In particular, after months of stalemate over whether and how Britain would leave the European Union, voters gave Boris Johnson and his Conservative Party a clear mandate in a December election to complete Brexit by the end of January.

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Brexit is one milestone on a longer road. Negotiations, which could last a year or more, will be needed to establish Britain’s relationship with the union on trade, immigration and other matters.

Investors appear relieved, all the same, that the country is taking a significant step in a process that has been playing out since the 2016 Brexit referendum. It may not be, to borrow a phrase from one of Johnson’s predecessors, the beginning of the end, but it is, perhaps, the end of the beginning.

“I think things are shifting, but more on a global scale than domestic,” said Matt Lloyd, chief investment strategist of Advisors Asset Management.

“Brexit is freeing capital that has been on hold,” which should help stimulate economic activity in Europe, he said.

Elsewhere, he foresees loose financial conditions in China giving authorities more scope to stimulate growth.

“The bigger bang for the buck is going to come from international markets,” Lloyd predicted.

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International stock funds rose 8.8% in the fourth quarter, surpassing the 7.6% gain recorded by their domestic counterparts.

For the full year, domestic stock funds handily outperformed. The average one was up 26.8%, with specialists in technology, financial services and consumer businesses doing especially well. The average international fund rose 23.5%, with little variation among regions.

Edward Yardeni, president of Yardeni Research, favors economically sensitive stock market segments like energy and industrials. He expects them to benefit from “another year of central banks flooding the system with liquidity.” Other suggestions include shares of European automakers and companies that cater to consumers in emerging markets.

Yardeni added that he was concerned about high valuations and deteriorating credit quality in the bond market. Overall, he said, he had “a bittersweet kind of outlook.”

Moore said she preferred “U.S. companies with a large, global reach” and “owning business models that can generate free cash and profits in a more modest growth environment,” even though they are very expensive.

The BlackRock Global Allocation fund, which Moore helps manage, recently reported holdings in several companies that seem to fit the bill, including Microsoft, Apple, Visa and Becton Dickinson.

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“These companies are already trading at premium valuations to the rest of the market,” she said, “but they deserve it.”

Moore said it’s time for the economy to put up or shut up.

“A real key is going to be stability in the economic data, not just things not deteriorating less than worst-case scenarios,” she said. That means “firm labor markets, solid wage gains, no risk aversion when it comes to the average consumer, and positive earnings momentum throughout 2020.”

Sri-Kumar finds that a tall order and encourages investors to “protect your nest egg going into the future” and “become more defensive entering 2020.”

He would own Treasury bonds and bond surrogates like utility stocks through such vehicles as the SPDR Long Term Treasury exchange-traded fund and the Vanguard Utilities ETF. They would do well if economic growth fails to meet high expectations and bond yields fall again.

Other choices include stocks in emerging economies that run small current-account deficits, such as Brazil and Mexico. He would avoid market segments that depend heavily on international trade, including technology and exporters to China.

Atteberry encourages caution, too. Whatever percentage investors normally keep in cash, he would double it, and he would keep bond maturities below five years and stick to higher-quality issues. Be prudent, not greedy, in case Wall Street suddenly changes its mind again about the economy, he said.

“Financial assets have done very well in the last 10 years, and you’ve had a really good run since 2016,” he said. “Take some of those profits and harvest them. Get liquid, and sit and wait.”

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