The new year begins with a painful question: is the correction of the stock market of the last three months the harbinger of a terrible year 2019 or a launching pad for a new bull market? Although the decisive stock market forecast for 2019 is stupid, some trends make it clear.
At first glance, financial markets seem to be experiencing problems. On Christmas Eve, the S & P 500 index reached a 20% threshold for the bear market.
Few experts see a recession, but signs of slowing economic growth are accumulating. The yield on 10-year Treasury bonds fell to its lowest level since April, even though the Fed is tightening and unleashing its quantitative easing program.
The financial sector is in a bear market: SPDR Financial ETF (XLF) has fallen by more than 20%. Crude oil prices are also in a bear market, as oversupply responds to concerns about a slowdown in the global economy. FAANG shares, which formed the basis for most of the stock market growth in 2017–18, are destroyed. And the market lacks a clear new leadership. The index of leading shares IBD 50 fell by almost 30% from its maximum.
So how to judge the next year? As always, smart investors at any time will open their eyes to the real behavior of the stock market. But for the stock market forecast for 2019, seven factors are important. How they act will play a huge role in how stocks will work.
Of all these factors, two stand out due to their unpredictability and consequences: trade policy and interest rates. A trade war can suddenly encompass several industries and lead to side effects. Markets fear that the Fed's interest rate hike will be too strong, leading to a recession in the economy.
Here is a look at each of the seven factors, as well as tips on how stock market investors can prepare for what 2019 will bring.
1. Stock market volatility in 2019
For most of 2018, the stock market suffered a trade war, concerns about treasury yields, political spasms in Europe, and other risks. In the last months of the year, investors could not bear it. With the beginning of 2019, the market should get out of the worst correction since 2011. On December 20, the Nasdaq dropped to the depths of the bear market.
Volatility highlighted most of the 2018 market. Based on daily price fluctuations, 2018 had the double volatility of an unusually quiet 2017. But it was below the average of price spreads and slightly above the average of change, according to the market history, dating back to 1962. The last three months have been significantly above average, which is typical for bear markets.
IBD's current forecast is “the market in correction,” urging investors to stay in cash as much as possible. Stock opportunities remain scarce. Few leading stocks form solid foundations, and many breakthroughs over the past few months have failed. Investors will need to be patient and wait for the bottom.
With the S & P 500 index rising by about 135% from the 2009 low, he felt that he was living next to the San Andreas mistake in California: the more time passes, the closer we are to the main shaker. But just as it is necessary to reduce the pressure on the tectonic plates of the Earth, it is necessary to squeeze out excess specs from time to time.
A bear market or even a big correction serves a useful purpose by removing excess foam. The high multipliers of prices and profits are falling, and a new wave of institutional purchases is causing the next bull market. The main stock market falls usually form three downward directions, and today the indices are in the third retreat after the top.
While the stock market has not been so bad for years, there is no indication that this super-bear market is inevitable in 2008 or 2000. Mega recessions occur when there is extreme self-confidence. For example, marginal debt rose to a level not seen since 2000, before the market reached its peak in 2007. The growth of marginal debt is barely noticeable at the moment.
2. World shares against the US stock market forecast for 2019
Most of the stock market forecast for 2019 depends on the strength of the economy in the United States and abroad. Despite the fact that the US stock market ended in 2018, it still outpaced most of the major global indices. And the same can happen in 2019.
While the S & P 500 fell by about 7% by 2018, the Shanghai composite declined by 25%, Shenzhen by 33%, French CAC 40 13%, German DAX 20%, London FTSE 100 15% and the Japanese Nikkei almost 12%. Brazil and India, however, grew by 12% and 5%.
According to Kelly Bogdanov, vice president and analyst for portfolios at RBC, economic indicators in the United States were much higher and corporate profits were much higher than in other developed countries, even after they refused to raise taxes in the United States.
“It is clear that we still see economic problems in Europe and Asia, including China, and China is a very important factor,” Bogdanova said. Political problems in Europe complicate prospects for 2019.
Central banks are another important factor to observe. Despite the tightening of US and Canadian policies, monetary policy in Europe and Japan remains largely adaptive.
IHS Markit estimates growth in the eurozone by 1.5% in 2019, compared with 1.9% in 2018.
It is expected that the US economy will continue to grow, albeit more slowly. RBC forecasts US growth by 2.5% next year, which is in line with most other forecasts. US GDP growth is estimated at 2.9% this year, the highest since 2005, according to a BMO Capital Markets forecast in 2019.
In fact, economic growth in the United States is on its way to becoming the longest in the entire history of observations by summer. A Blue Chip survey showed that professional forecasters estimate the likelihood of a recession in the United States next year at 24%, according to BMO. The lower the probability of a recession, the less likely the market will remain in a bearish area.
3. Trump Tariffs And China Trade War
The trade dispute between the US and China is putting pressure on the global economy and the stock market itself, Bogdanova of RBC adds. This forces companies to postpone capital decisions, and in general, there is growing uncertainty for executives.
According to Bogdanova, the trade war threatens to exacerbate the problems of China. But Beijing has some leverage that it can use to stimulate its economy, and she expects China to resort to them in 2019.
At the moment, the United States and China are in a state of 90-day truce during the trade war, while they agree on an agreement that has become a central element of the administration of President Trump.
Unlike corporate profits and monetary policy, international trade requires diplomacy. That is why it is difficult to assess the risk when assessing the stock market forecast for 2019.
“We believe that the escalation of the trade war with China could have a significant direct impact on the profits of the S & P 500,” JPMorgan warned in its forecast for 2019, repeating other forecasts. Escalation can lead to indirect costs, depending on the degree of retribution on the part of China and on damage to business confidence and the global economy.
The strong dollar helped protect US companies and consumers from the effects of tariffs, said Sal Gatheri, senior economist at BMO Capital Markets. "Tariff collection" for GDP is likely to be limited to 0.4%. “Due to slower global demand and an increase in weighted in dollars by 8% this year to 16-year highs, it is expected that a further increase in the US trade deficit over ten years will lead to an increase of 0.5 (percentage points) growth in 2019.
4. Forecast of the Fed rate increase
How the policies of the Federal Reserve System manage interest rates is a serious issue in the stock market forecast for 2019. The Fed raised interest rates four times in 2018. On December 19, politicians identified two more rate hikes by the Fed in 2019. forecast three Fed rate hikes. But Wall Street was expecting a more bluish tone, and stocks fell.
However, markets are still skeptical that the tightening will continue The yield on 10-year Treasury bonds tends to decrease, and FedWatch Cboe shows that traders do not expect rates to increase in 2019.
Nearly record low unemployment and other optimistic indicators have led the Fed to raise borrowing costs. Growth rates put pressure on profits and profits.
Perhaps more alarming than the Fed rate hike is the partial inversion of the treasury yield curve, which allows us to predict recessions.
The difference between the treasury yield for 2 years and 10 years was reduced to 13 basis points. Once a 10-year yield is below 2-year, a recession is historically possible.
Although this has not happened yet, at the beginning of December the spread between the treasury yields for 3 and 5 years and the yields for 2 and 5 years became negative. The last time this happened was in July 2007. Four months later, the stock market peaked and the Great Recession began.
However, the inversions at the short end of the treasury yield curve are not good predictors of recessions, says LPL Financial Research.
The best indicator is the inversion of annual and 10-year treasury yields. Studies conducted by the San Francisco Federal Reserve show that these inversions have become the signal for all nine recessions in 60 years.
Keep in mind that signals have a significant delay.
"Contrary to what many people think, the inverted yield curves do not always sound the alarm when selling," said Ryan Detrick, a senior market analyst for LPL Research, in a report on December 5. "In fact, if you look at the last five recessions, the S & P 500 did not peak at an average of more than 19 months after the inverted yield curve."
However, in the last two cycles of tightening the Fed has gone too far, which led to a recession in 2000 and 2008.
"The yield curve says the Fed has already managed inflation," said Christopher Haizi, Merrill Lynch's chief investment officer. "When was the yield curve wrong?"
5. Small caps and stock market forecast for 2019
Small-cap stocks can be an important fuel for the entire market. But at the end of 2018, they led to a recession in Wall Street. Will they continue to be a brake?
In 2019, small cap companies faced some uncertainty. According to Scott Hood, CEO of First Wilshire Securities Management, a Los Angeles-based company that specializes in investing in small capitals, estimates for growth in small limits are stretched compared to values in small limits.
“We are currently at the largest price / earnings gap between Russell Growth in 2000 compared to the cost of Russell 2000 from 2003,” said Hood. Growth Russell 2000 has an average price of up to a book value of 4.5 versus 1.8 for an index of the value of Russell 2000.
“There was too much excitement in growth promotions. This has led to such stories as Bitcoin, cannabis and the great search for the unicorn, ”he told IBD.
The picture of profit for small capital letters is also not so rosy. According to First Wilshire estimates, 37% of Russell 2000 have a negative trailing income. This is 39% for the Russell 2000 growth index.
Taking all this into account, the year 2019 can turn into a market of small-scale stock collectors, which will require investors to carefully select their shares.
6. Profit growth in 2019
Revenues are a catalyst that can lead to higher stock prices. Profit growth in the S & P 500 accelerated in 2018, largely due to Trump's tax cut.
But how does profit affect the stock market forecast for 2019? Comparisons will be tougher. In addition, since the companies reported high profits in the third quarter, they began to significantly lower estimates for the 4th quarter and 2019.
FactSet estimates that profits in 2018 will grow by 20.3%, which will be the best increase since 2010. The estimated increase in revenue of 8.9% will be the highest since 2011.
According to the calculations of FactSet in 2019, the profit growth of the S & P 500 was only 7.9%, while revenue grew by 5.3%. A hard labor market, growing raw materials and higher financing costs may lead to pressure from American companies, but it is not yet known how much. A strong consumer in the US should be able to absorb higher prices if companies try to shift costs.
Corporate profits are likely to peak in 2018, said David Bianco, head of US equities and chief investment officer of DWS, on November 26. “Since this fiesta was mainly caused by such special effects as tax cuts, the repatriation of the dollar and the rise in oil prices, it is not surprising that the party cannot continue,” he said.
7. IPO calendar for 2019
Initial public offers can present investors with new stocks and revitalize the market. It is expected that in 2019, some major brands will begin to place their shares and raise capital.
“After many years of rumors about IPO, Uber, Lyft and a large number of other unicorns firmly point to plans to complete some of the largest IPOs,” reads the annual review of Renaissance Capital. According to the company, which specializes in IPO shares, Uber's IPO can raise more than 13 billion dollars, and Lyft – more than 5 billion dollars.
Other large IPOs are under development: Pinterest social advertising platform, Slack collaboration software company, Peloton Interactive exercise bike and Robinhood free stock trading application. As in 2018, technology and biotech companies dominate the 2019 IPO.
Revenues from IPOs can easily exceed $ 47 billion raised in 2018, despite the potential reduction in the number of deals, Renaissance Capital said in a statement. The same risks that led to a fall in the stock market could lead to the 2018 IPOS in the range of 125 to 200 companies, compared with 190 this year.
The IPO market in 2018 increased by 19%, while revenue grew by 32%. But overall, it was a bad year for IPO stocks. As of December 13, the Renaissance IPO index for the year fell by 10.8%, behind the growth of the S & P 500 by 1%. The average total return on the secondary IPO market in 2018 was -10.5% compared to 14.3% and 13.2% in the previous two years.
What should stock investors do now?
Of course, the stock market will need more than just a few IPO blockbusters to get back on track. The most reliable signs will come not from the IPO or Washington market, but from the stock market itself.
Investors should daily monitor how the major stock indexes operate, which sectors are recovering, and which stocks form good bases. Just as the market signals its highs, it also signals bottoming and can do this even when all the news seems negative. Read the “Big Picture and Stock Market Today” columns to keep up to date.
Watch out for stocks with a good income and sales growth that work better than the general stock market. Such actions may become the first leaders in the next upturn and make great progress.
As completed in 2018, some software leaders turn into potentially good investments. Atlassian (TEAM) forms one of the most attractive bases. Five9 (FIVN) is trading mostly above its 50-day moving average, as long as it is based.
In finance, Paypal (PYPL) stays around 75. In the consumer space Planet Fitness (PLNT) used its last decline to a moderate 17%. And in healthcare, a manufacturer of sleep apnea treatment Resmed (RMD) forms a decent cup with a handle.
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