Market Pulse: 2019 market preview part 1
January 18, 2019
After reaching an all-time high earlier this year, the nearly decade-long bull market gave back some in the fourth quarter.
From its September high, the S&P 500 fell 19.75 percent before recovering some. While it fell 0.25 percent short of the "bear market territory" that the media like to talk about, most stocks fared worse. At year-end, two-thirds of S&P 1500 stocks were 20 percent or more off their yearly highs.
Does this mean more selling is to come? Maybe, maybe not.
Market tops normally occur when investors are overly optimistic if not exuberant (think March 2000). They don't come amid widespread pessimism and a focus on all that could go wrong, which pretty much describes conditions now (Brexit, rising rates, weakness overseas, debt levels, a trade war, drama in D.C., etc.).
Widespread pessimism is more the case at market bottoms. John Templeton said the best buying opportunity is "at the moment of maximum pessimism." He also said, "stock prices are a lot more volatile than stock values." Indeed.
Some say the market is pointing to a 2019 recession. I disagree. There is no data to support that view and recessions are usually preceded by inflation and/or asset bubbles. No signs of those. Will we go from GDP growth of 3 percent one year to a contraction the next or go from creating 312,000 jobs in a month to losing jobs?
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Possibly, but what would trigger such a change? After all, confidence is near an all-time high, and a record number of people are working and making more than ever, which is why holiday sales were the strongest in six years. Consumer spending is two-thirds of GDP.
Without a spending slowdown what would trigger a recession? We will have a slower growth rate, yes, but nothing worse this year. No recession.
Almost everyone expects the economy to slow, but keep in mind that slowing need not be the same as contacting. I expect modest GDP growth this year of 1.8 to 2 percent with profits rising 5-8 percent. The market shouldn't mind that.
Think about it. These are the same conditions that prevailed for much of the last decade in the aftermath of the global financial crisis, and stocks performed well for investors. Progress on U.S.-China trade talks would surely help matters.
With the market advancing 3 percent already in 2019 my prediction of an above average year isn't looking so extreme. More on this and our fixed-income outlook next week.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.