The sun will come out for investors in 2019 even though the stock market recently has been beat up, going down more than 10 percent.
That was the message of several analysts in the past week. They say the bull market in stocks, that began a decade ago after the crash of 2008, shows no signs of dying. That recent market dive led some to fear the bull is comatose and a recession is near.
However, several market observers said the bull is not on his deathbed.
The Bull Survives
“We see none of those signals today. We see no sign of over bullishness,” said Dan Suzuki, an analyst with Richard Bernstein Advisors.
“Not quite yet,” added Omar Aguilar, chief investment officer for equities, Charles Schwab Investment Management.
A bear market sign would be a reduction in liquidity. But Suzuki says “banks are not toughening lending standards.”
Aguilar says another reason why the bull lives is that the fundamentals supporting the market, such as economic growth rates, are strong.
Nevertheless, Aguilar cautions that the recent market dips along with interest rate increases will continue even as the bull market continues.
“As the Fed continues its path to raise short term interest rates, we should expect high volatility in capital markets, especially if trade concerns continue to dominate the headlines,” he says.
The Markets and the Economy Still Good
However, Aguilar believes the market will still head north because underlying economic numbers are good.
“The U.S. economy keeps growing at a good rate without signs of overheating, corporate earnings continue to be solid, enjoying tailwinds from the fiscal stimulus implemented last year,” Aguilar adds.
So how will we know the bull is sick?
Investors get carried away with stocks even when they are overpriced, industry observers say. They ignore other kinds of investing, such as bonds, that diversify a portfolio. There is an inverted yield curve. That is when short term interest rates are higher than long term rates, a sign a crash is near.
Analysts point to another crash warning. Companies report low profits.
Suzuki’s boss sees none of that.
“Bear markets don’t typically occur when there is too much good news and investors are concerned the good news can’t continue,” says Richard Bernstein, a longtime analyst with his own firm.
“Bear markets are usually fueled by investors disregarding deteriorating fundamentals and rationalizing under-performance,” he adds. “That doesn’t seem true of the equity market.”
Stocks OK, but Look Out on Fixed Income
Bernstein says investors’ fears on stocks are short sighted, but he has a concern.
“Investors,” Bernstein says, “seem myopically concerned about equity market volatility, but don’t seem very concerned at all regarding the growing risks in fixed-income and seem oblivious to the bonds’ already multi-year under-performance.”
Recently, officials at other money managers sounded the same don’t panic theme.
Yes, the market will continue to be a rocky ride for investors. And yes, a bear market will eventually come in a couple of years, but neither the stock market nor the economy is likely to blow up in 2019.
That was part of two similar economic and investment outlooks from UBS and Natixis officials in separate press briefings in New York City last week.
Rocky Ride Ahead
Market volatility will continue in 2019 as well as central bank tightening, said officials at both sessions. But there is some equity growth left in this now long in the tooth bull market, which won’t drag down the economy, they said.
“We don’t currently see the conditions commonly associated with an impending recession, and there are still opportunities for pockets of value,” UBS officials wrote in “Turning Points. Year Ahead 2019.” A recession, they said, is still 12 to 18 months away.
However, both Natixis and UBS officials warned that next year there again could be some tough times for investors.
“The volatility situations that have existed through 2018 are likely to continue throughout 2019,” said David Jilek, chief investment strategist for Gateway Investment Advisers.
What will keep volatility high in 2019?
Changes in Federal Reserve bank money creation, fiscal policies continuing to generate huge amounts of red ink and an expected drop in earnings numbers are playing into the high volatility rates, Jilek added. He said that recent high earnings numbers are “probably unsustainable.”
Less Money Creation
And then there are the central banks.
UBS officials noted that 2019 will be the “first time since the global financial crisis when central bank balance sheets are on track to end the year smaller than the they were at the start of the year.” They predicted that the Fed will increase interest rates by some 100 basis points over the course of the year.
However, both UBS and Natixis officials hedged their 2020 predictions by warning that everything could be ruined if a trade war breaks out between China and the United States. Still, they said that it is unlikely that leaders in the two nations would let the disasters of a tariff war happen.
While tariffs talks continue between the representatives of the nations, UBS officials predicted moderate growth or small negative numbers in the United States next year. They also predicted a bear market in 2020. By the way, UBS officials also expect that, when the bear market does come, it will be an average one of about 20 to 25 percent.
Still, UBS officials along with their Natixis counterparts made the case that it makes sense to get the last benefits of this bull market. They said that historically bull markets, just before bear markets and recessions, often have generated one last great surge of growth. For instance, at the end of a bull market cycle in 1948, stocks rose over 20 percent in the six months before it ended.
The Good and the Bad
UBS officials also said that, in the best-case scenario, stocks could rise 10 percent to 15 percent in 2019; in the worst-case scenario they could be down some 10 percent. Still, they argued that hanging around to the end of a bull market is an effective strategy.
“We think that staying invested will pay off, although investors should prepare for great volatility as the market begins to anticipate the end of the cycle,” UBS officials wrote. Big investors, a Natixis official noted, are getting the message.
Indeed, institutional investors are expected to stick with their stock allocations in 2019, according to David Lafferty, senior vice president and chief market strategist for Natixis Investment Managers. “They are either very happy where they are and they don’t know what to do,” he added.
Lafferty said a recession will happen, “but just not in the near term.” But in 2019, he said, that the global economy is “decelerating to some degree, but it is likely to stay in a positive range.”
This last bit of bull market trend, said the officials at the Natixis briefing, will work against index investing. That’s because a mature bull market will require investors to be nimble; and to look to different places to find value, another official said at the Natixis briefing.
“It will make the case for active management,” said Andrea DiCenso, a co-portfolio manager for Loomis Sayles.
And where will one find good buys?
Growth or Value?
Growth won’t be nearly as good as value investing in 2019, one manager said.
“We’re very excited about the market. We see a lot of value in the market,” according to Colin Hudson, a partner and portfolio manager for Oakmark Equity.
“We think that next year could be a very good year,” Hudson said.
And besides value-oriented investments, where will there be good buys in 2019?
UBS officials secular investing themes that should do well include those investments that benefit from population growth, aging and urbanization as well as sustainable investing.
“Investors,” UBS officials wrote in their 2019 review, “could take advantage of the fact that a wealthier world is willing to spend more on ecological goods such as better air quality for its children. There is now ample evidence that sustainable investing doesn’t hurt your portfolio.”
UBS, in its publication, also said U.S. loans, emerging market equities and Japanese equities will be attractive investments. Other opportunities include U.S. and European energy sectors, UBS said. They are predicting that “oil prices will recover in early 2019.”
What should Joe Investor do?
Investors, with a plan, financial pros say, can survive anything.
Forget Rocky Markets
That is essentially the position of two veteran New York City area advisors asked about recent market declines.
If the bull market is over, clients can still benefit from staying invested, say Ronald Roge and Bernard Kiely.
“We put together long-term plans for clients based on their risk tolerance, and want them to stick to it. If we are going into a bear market, another bull market will occur again in a few years,” according to Roge, an investment advisor in Bohemia, New York.
“We all know the inevitable bear market is overdue,” adds Kiely, an advisor in Morristown, New Jersey. “But my clients are well positioned to weather the storm.”
Kiely adds the key to investing success is hanging around to enjoy bull markets by surviving bad ones. That, he notes, requires an appropriate long-term strategy.
For instance, young investors can be more aggressive—they have more time to make up for losses. Older investors generally should be conservative, Kiely says.
Fight It or Be Your Own Worst Enemy
Resist, Roge warns, the dicey idea of market timing, frequently entering and exiting markets.
“Market timers,” he adds, “make at least two mistakes.”
Schwab’s Omar Aguilar warns most investors “are affected by behavioral biases and it is important to have a disciplined process to protect them from overreaction to short-term market movements.”