2019 Market Outlook

What does 2019 look like for the market? Stocks, Bonds, Sectors and of course, politics...

 

Today is the 1st day of 2019 and tomorrow marks the first day of trading for the new year. Every investor is hoping the volatility of the second half of 2018 doesn’t repeat itself this year.

 

While there are many different opinions of what exactly happened to the market in 2018, many investors are still trying to pinpoint what specific issue was the primary cause. As of this point, it’s like complaining about a spilled glass of milk. I say clean it up and get yourself a new glass of milk. 

 

However, if investors truly need specific factors, I believe I have three; rising interest rates, China/U. S tariffs and earnings forecasts for 2019.

 

I believe as we move into the first quarter, the China/U.S. tariff issues will resolve itself, but it will be a rocky road until a deal gets done. As we saw in late 2018, the market reacted quickly to any news about an agreement or lack of a deal between the two nations. The same will be the case of 2019.

 

Rising rates are a different problem for the market. The Federal Reserve took an aggressive view of the market in 2018 and felt they needed to combat an over-heating economy, recession or any other economic crisis facing the country. As the market became more volatile, and the market had large swings to the negative in the last couple of quarters in 2018, the Federal Reserve shifted to a more dovish position with some members moving away from the need to raise rates 3-4 times in 2019 to some now talking about maybe 1 or none in 2019.

 

The corporate earnings part of the equation is more natural to address. If the cost to borrow money is becoming more expensive, and wages for employees are rising then profits are going to be squeezed. To further complicate the matter, a company that is a multi-national must deal with a sluggish global economy and tariff concerns, and this has caused companies to issue early earnings worries for 2019. If earnings estimates don’t meet expectations, then volatility will continue across all sectors.

 

On a positive note, there will be some bright spots for 2019, but I believe the year will test investor's patience, focus on long-term goals, and determination.

Before we step into 2019, let’s take a step back and look at a few surveys that were completed in the later part of 2018 and how they reflect some investor’s feelings heading into 2019. We must always remember; a person’s perceptions of the world may be a reality to them even though it may not be entirely correct. I believe these perceptions are shaping the current environment.

 

In October, a study completed by Allianz Life's 2018 Market Perceptions and it revealed that investors were concerned about a “big market crash” and some were predicting a ‘recession.”  Many fear any major correction would have a critical impact on their portfolio and they may not have the time to rebuild before retirement.  However, realistically, I know investors will continue to invest in the equity markets because of another study. According to a survey from personal-finance website GOBankingRates, 42 percent of Americans have less than $10,000 saved.

 

In a similar study, a major insurance company reported some 50% of investors had saved less than $75,000 for retirement. Many financial professionals recommend that investors save about a $1 million for retirement. However, that is not a realistic goal for the average investor. Investors should talk to a financial professional for their specific goals.

 

We have discussed the foundation of what happened in 2018, now let's take a closer look at the landscape of 2018 and 2019.

 

If investors focus on the news, 2018 was a horrible year, but it was not a bad year. The S&P 500 was down -6.24%, Nasdaq down -3.9%, Russell 2000 was down -12.18% for 2018

 

Stocks and Bonds

In 2018, the major indexes were down for the year; however, individual equities reported a different story. While many stocks were down dramatically, some stocks finished up for the year.

 

While the market declined there was some disparity in sectors effecting both big-name and small name stocks. Most were hit hard from their highs. Some favorite name stocks like Facebook, AT&T, General Dynamics, and Campbell Soup were down 20% or more for the year. It wasn’t all negative, companies like Amazon and Netflix were up over 25% and even better, Advanced Auto and Advanced Micro Devices finishing up 57% and 79% respectively.

 

Depending on what an investor's mutual funds were holding in their top 10 stock positions during the year, it will dictate why they lost or made money for 2018. If an investor's fund was down dramatically in 2018, review the top holdings and there may be a correlation between the performance of the funds and perhaps some individual stocks that dropped substantially during the year.

 

I will make a short summarization list.

 

Large Cap Growth funds and Large Cap Value funds had mixed results with more funds up than down. On the negative side, Balanced funds, Bond funds, Target funds, Foreign Growth and Value saw more down than up. In a few days, investors will have their actual December statements and can judge for themselves.

 

Bonds reported a different story. Many investors felt with interest rates rising; bonds would have a better year, but that scenario didn’t work out. The 10-year bond did flirt with the 3% range for a while but could not hold the level and again drifted below 3% in the last two months of the year.

 

There are some major question that remain on bond investor's minds for 2019.  "Does the Federal Reserve back off on the number of rate increases this year?" If we stop raising interest rates does that mean the economy isn’t good?  What type of bonds should I buy at this point.?

 

For investor's wanting the safety of bonds but needing yield or growth in 2018 will need to look at equities or corporate bonds again for solutions.

 

Sectors funds and investments had similarly mixed results as well for 2018. We saw Technology, Health, and Utilities mostly up, and Industrials, Financials, and Consumer Staples were most down. The only bright spot in Industrials was Aerospace. I believe we shall see a slight turn in sectors but not a significant shift for 2019.

 

I think Technology, Health, Utilities will retain their spot but there is potential from the Industrials gaining some positive traction. The low cost of oil due to a surplus in inventory may hurt the oil sector but could benefit transportation stocks. A definite conclusion to tariff talks could see improvement with other industrials.

 

In addition, I think active investments will out-perform passive investing due to the overall nature of the market in 2019. 

 

We will continue to talk about high administrative fees and poor performance again in 2019. Looking at a category like Large Cap Growth funds and seeing some funds down -6.5% and others up 18%, I would want to know why there is such disparity. While one year doesn't win an argument, I do see some of the same poor performer’s year in and year out and many investors holding those funds. It should be hard to over-look a fund that is underperforming its peer group by 7% a year. Taking a step back, over a 3,5- or 10-year period that is a substantial amount of difference for an investor.

 

While no investor has been happy with the market in 2018, employees are getting a silver lining with current conditions. If employees have quality, high performing funds in their 401k/403b plans, they are dollar cost averaging into those funds. Employee are now getting those same shares at a lower price. In the long-term picture, I always like getting something of value at a lower price and then watching its worth increase over time.

 

The political climate in the U.S will not improve in 2019 and could worsen if the Democrats focus on impeaching President Trump as some in the party have suggested. Considering some of the issues facing the country from immigration, healthcare reform, infrastructure to a ballooning deficit, the focus should be on improving these issues first.  

 

On the one hand, Wall Street and corporate leaders like gridlock in Washington because it means sweeping legislating will not be agreed upon readily, but they do not like complete political discord. As I have mentioned in the past, the markets do not like uncertainty, but they will tolerate it if there is positive movement on the horizon. 

 

Investors in 2019 will have to do a better job tuning out the static of the media. For example, the President firing the Federal Reserve Chairman. The market had several negative gyrations on this headline, and in turn, the media took it to another level. Just a note here, a President could potentially remove a Chairman on criminal activity and that is about the only exception.

 

However, in the case of Chairman Powell, he is also a Federal Reserve Governor and that position is not subject to a President's power to remove.  Second, 12 board members vote on raising or lower interest rates. Removing, a Federal Reserve Chair, would not change the over-all board and the repercussions on a global scale would dwarf any correction seen in current times. Finally, since President Trump has linked himself closely with the stock market, I don't believe he would want to see a decline of that magnitude before a potential run for re-election.

 

Each year, clients ask for individual stock picks and ideas for this report. While this report is for my clients, I have found it has reached other investors who are non-clients and even other financial advisors; I always find the last one funny.  An investor comes to me for my ideas and takes them to his or her advisor who knows nothing about the logic behind the decisions or recommendations.  More importantly, since there is little background knowledge, the investment may not even be suitable for the investor.

 

As mention above, investment suitability is very important. Each investor has different time horizons, investment risks and even knowledge about investments. Just because a stock has a great year doesn't mean its ideal for everyone. The risk that accompanies each investment may be much higher than a person is comfortable with, and that is another reason I don't provide individual stocks in this report.

 

Usually, I would look at the first half of 2019 and give a more detailed view of what is on the horizon. However, there are so many questions that need to have answers; it is difficult to see beyond the first quarter now. I believe several items are the most important to the market now.

 

First, do China/U. S talks have substance or are the two countries just going through the motions? Two, are investors/analysts going to re-set their expectations and mindset about corporate earnings? Third, are global markets going to show any improvement in their financial affairs? Finally, is a balance of power going to mean traditional gridlock in Washington or is chaotic warfare the tool of politicians?

 

Looking at current conditions, single-digit returns on equity investments could be a common thread in 2019. Bonds will continue to struggle as investors still ignore 3% yields. Active investing may out-perform passive investing as investors look to cherry-pick quality names that have been beaten down. More mergers and acquisitions (M/A) as new industries like cannabis and space move to the forefront. There could also be M/A in existing areas like health care as healthcare reform comes back to the spotlight in Washington.

 

The days of organic growth are beginning to disappear as companies that were once small and nimble have become the behemoths of their sector and need new blood to maintain their growth. 

 

In 2018, I mentioned that growth in 2018 was not going to be as easy as 2017, but the year had potential. As we enter 2019, I see more hazards ahead than I saw with 2018, but I also see much growth if conditions improve.

 

I wish everyone a good journey in 2019 and hope your investments continue to shine and offer you profitable returns.

Start 2019 on a positive note, speak to a financial advisor or create "your" own investment blueprint. Don't go through another year guessing if you are doing the right thing. It is always easier to sit down and review a document to see how an investor has done instead of guessing.

Disclaimer:

These are the views of Aurora Strategic Advisors, LLC (ASA), and should not be construed as investment advice. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Neither the ASA nor the named Broker dealer or Investment Advisor gives tax or legal advice.

Please consult your financial advisor for further information. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.