The third quarter of 2019 saw an uptick in investor anxiety. The U.S. equity market priced in an imminent recession scenario and investors embarked on a flight to safety and quality, as evident in sector and market-cap category returns. As the quarter drew to a close, we braced ourselves for another difficult quarter ahead.

However, we experienced a turnaround in the fourth quarter. Early in the period, macro data started to improve. Notably, U.S.-China trade tensions eased and the third-quarter earnings season ended up being relatively robust compared to market expectations. Both of these things gave way to more positive investor sentiment. A strong November employment report also supported performance, as it gave the U.S. Federal Reserve (Fed) reason to pause its monetary-policy stance.

In the U.S. small-cap equity world, growth outperformed value during the fourth quarter, attributable to strength in areas such as biotech and technology. However, investors also preferred cyclically exposed sectors, including financials, industrials and materials. Health care also helped drive market strength during the quarter. Overall, equity markets turned in strong year-end 2019 results.

Fourth-quarter performance may have put a stop to recession fears in the short term, but we feel that larger economic forces should provide comfort over the medium term. The Fed has indicated that it is likely to hold interest rates steady, barring any major negative market event. In our view, these recent monetary policy decisions will help to underpin, rather than accelerate, current economic growth. Global growth is and will likely remain tepid. However, we think that the Fed and other central banks’ actions to lower or maintain interest rates should help avoid recession in the near term.

The housing market has been a recent boon to the U.S. economy in the current, lower interest-rate environment, and liquidity has been increasing. We believe these conditions will continue into 2020 and possibly beyond. This is good news for small-cap stocks in particular, given the relatively high exposure of the Russell 2000 Index (a proxy for the small-cap market) to the U.S. housing market.

Manufacturing and industrial activity in the U.S. remains relatively weak. However, in our view, they appear to be bottoming—a plus for the economic outlook. Furthermore, fourth-quarter progress on the U.S.-China trade war has sparked confidence among U.S. companies. As a result, they are now more willing to invest in capital and operation expenditure.

In our view, U.S. GDP will experience a hangover from the U.S.-China trade tensions, resulting in decelerating growth for 2020. We feel that modest consumer demand and economic activity levels should also contribute to this phenomenon. We believe that these headwinds will subside as the year goes on, however, and that GDP may accelerate slightly in 2021.

The U.S. presidential election coming up in November of this year may inject volatility into the market. In response, American corporations are likely to exercise caution. While recent policy uncertainty has subsided, the past few years have served as a reminder that political uncertainty is an ever-present risk.

While our outlook for the near term is low-growth but generally positive, the market is, of course, cyclical, and may experience a correction or dip down the line. This is why we encourage investors to keep the future in mind. We believe that higher-quality U.S. small-cap companies are likely to perform better in the long term. In our view, investing in higher-quality companies is a sustainable investment strategy because these companies can compound returns more robustly over time and hold up better in down markets.

Tim Skiendzielewski is an investment director on the North American Equities team at Aberdeen Standard Investments, where he co-manages the Aberdeen U.S. Small Cap Equity Fund.