Fears can fuel rises in stock markets

I was way too optimistic in 2018. That makes me even more optimistic for what’s ahead. When most folks expect bad times, stocks usually shine the following year. I see stocks rising 15 to 25 percent or more in 2019.

Scan your phone’s news feed. See anything good? Or mostly scary stuff ? I see primarily bad economic news and market predictions – warnings to avoid a nasty downturn – and recession forecasts.

Whenever you’re in a recession, and it’s widely recognized, stocks always rise. Sounds weird! But stocks are a leading indicator. They tumble before recessions start, then rebound while the economy keeps sinking.

And the aftermath of their bad returns is strong returns. My Dec. 17 column detailed how after corrections, when stocks fall 10 percent to nearly 20 percent from a recent high, the returns during the next 12 months average 34 percent before dividends. That’s been true since 1926.

And after bear markets, when stocks decline 20 percent or worse from a recent peak, the next 12 months average

47 percent.

Note this: Three bear markets in history weren’t accompanied by recessions. Their aftermath averaged up 29 percent in the next 12 months. Sentiment alone won’t decimate stocks.

As I write, 2018 is on track to finish down a little. I wrongly expected stronger – mea culpa! Yet as I’ve previously detailed, after years when stocks finish between down 5 percent and up 5 percent, the next year has averaged 24 percent, including dividends.

Following all negative years since

1926, the next year has averaged 12.4 percent. Extrapolating 2018’s weakness into a 2019 decline argues against hundreds of years of stock market history, arguing “This time is different.” Legendary investor Sir John Templeton called those investing’s four most dangerous words.

The year 2018 was among four calendar years in modern history when stocks and bonds both trailed cash. Some people warn there’s nowhere to hide. Yet following all rolling 12-month stretches when cash beat stocks and bonds, stocks’ average return over the next 12 months was 15.7 percent, with a

75.9 percent frequency of gains. People draw parallels between now and 2008 – unjustified in my view (See my Sept. 9 column). Fighting the last war almost never works. And there are so very many differences. Even so, 2008 fits my pattern. In 2009, the Standard & Poor’s 500 rose 26.5 percent.

Then, too, Decembers that fall like a rock usually bounce the next year. To me, after almost half a century in the investing business, December looks like mass forced institutional liquidations to raise cash before year-end to accommodate January liquidations. My best guess is it all ends with January. But I really don’t know. I just know to be bullish.

Through Dec. 19, U.S. stocks fell 14.5 percent in price terms since Sept. 20. Global stocks fell 15.8 percent from Jan.

26 highs. Several negative fantastical stories could knock down global stocks another 5-plus percent, technically a bear market. But is there really much difference between a correction of roughly negative 16 percent and a

low-20s mini-bear market that ends nearly as fast? It’s a distinction without much meaning. Historically, a steep rise follows.

This decline is relatively long. To expect a negative 2019, you’d have to expect one of history’s longest declines. To justify this requires huge negatives others miss. Stocks already reflect whatever everyone already chewed over like cud. You need negatives strong enough to defy normality! Particularly the long history of U.S. presidents’ third years – negative only twice, and not once since 1939. Year-three returns average 17.8 percent, far higher than stocks’ long-term average of 10 percent.

As Warren Buffett famously preached: Be greedy when others are fearful and fearful when others are greedy. Now it’s time for greed. Grit your teeth and own stocks.

Ken Fisher is founder and executive chairman of Fisher Investments, author of 11 books, four of which were New York Times bestsellers, and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter: @KennethLFisher

The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.