Will stocks rise in 2019? Maybe, but it’ll be stress­ful

The Malta Independent on Sunday - - BUSINESS & FINANCE -

No mat­ter which way the stock mar­ket goes in 2019 — and Wall Street has am­ple ar­gu­ments for ei­ther di­rec­tion — ex­pect it to be an­other gut-wrench­ing ride.

The mar­ket is fac­ing a long list of chal­lenges this up­com­ing year, from ex­pec­ta­tions for slower eco­nomic growth around the world to the re­strain­ing ef­fect of ris­ing in­ter­est rates. And the global trade war is still cre­at­ing un­cer­tainty as in­vestors guess how much pain it will ul­ti­mately in­flict.

All those risks have mar­ket strate­gists along Wall Street fore­cast­ing an­other tur­bu­lent year for stocks, and po­ten­tially one of the most dif­fi­cult years for in­vestors since the bull mar­ket be­gan its record-set­ting run in 2009. That fol­lows up on a 2018 where swings of hun­dreds of points within a sin­gle af­ter­noon be­came fairly com­mon for the Dow Jones In­dus­trial Av­er­age.

As 2018 showed, higher risk doesn't al­ways mean higher re­wards. As of Fri­day, all ma­jor U.S. stock in­dexes are down more than 8 per­cent for the year. And many strate­gists are fore­cast­ing a sub- dued per­for­mance for stocks in 2019.

"Iron­i­cally ... one would ex­pect higher re­turns with higher risk, but for the past two years we've un­der­scored a slightly more treach­er­ous en­vi­ron­ment for in­vestors: higher risk and lower re­turns," Van­guard's global chief econ­o­mist Joe Davis said as he un­veiled his fore­casts.

He ex­pects global stock mar­kets to re­turn 4.5 per­cent to 6.5 per­cent an­nu­ally over the next 10 years, in dol­lar terms, ver­sus the 12.6 per­cent they had pro­vided an­nu­ally since the mar­ket's bot­tom fol­low­ing the 2008 fi­nan­cial cri­sis.

A quick glance at the ti­tles of the 2019 out­look re­ports for var­i­ous in­vest­ment houses shows the in­creased cau­tion. "The end of easy" was Wells Fargo In­vest­ment In­sti­tute's ti­tle. "Nav­i­gat­ing volatile mar­kets" was UBS As­set Man­age­ment's, and "Lower ex­pec­ta­tions" was Bar­clays'.

All the cross-cur­rents push­ing and pulling mar­kets have an­a­lysts along Wall Street rec­om­mend­ing a con­trast­ing ar­ray of strate­gies. Some sug­gest fo­cus­ing on stocks from emerg­ing mar­kets, where pro­po­nents say par­tic­u­larly sharp drops in price have left them look­ing cheap. Oth­ers say high-qual­ity bonds look like the safest bet given all the ex­pected tur­bu­lence. And some op­ti­mists are fore­cast­ing a big bounce-back year for U.S. stocks, which they say no longer look ex­pen­sive rel­a­tive to cor­po­rate earn­ings.

As in­vest­ments of all types dropped this year, in­vestor psy­chol­ogy un­der­went a reset. For most of the last decade, mar­kets pow­ered higher in a largely smooth and grad­ual way. That meant big re­wards for in­vestors who saw any dip as an op­por­tu­nity to buy at lower prices. The mar­ket re­cov­ered from ev­ery wob­ble to set records again and again, of­ten quite quickly.

But this year has been dif­fer­ent. The S&P 500 is down 9.6 per­cent and is on pace for its first down year in a decade af­ter in­clud­ing div­i­dends. It also cre­ated a lot of heart­burn get­ting there, with two sep­a­rate drops of 10 per­cent over the course of the year.

"This is the brave new world for in­vestors," said Rich Weiss, chief in­vest­ment of­fi­cer of multi-as­set strate­gies at Amer­i­can Cen­tury In­vest­ments. "It's been nine years, 10 years, so it's go­ing to be a shock to some of the newer in­vestors who were not around in 2008 or in prior mar­ket turns."

Of course, no fore­cast is per­fect. A year ago, Wall Street was broadly op­ti­mistic about stocks and was fore­cast­ing mod­er­ate gains, largely be­cause economies around the world were grow­ing in sync. But the op­ti­mism fell apart as the year pro­gressed and growth rates di­verged, in part be­cause of ris­ing trade ten­sions.

Much will hinge on how re­silient the U.S. econ­omy re­mains in 2019. It has been ac­cel­er­at­ing since emerg­ing from the Great Re­ces­sion in 2009, and it got a big boost this past year from tax cuts, which helped cor­po­rate profits surge at their fastest rates in eight years. The cur­rent eco­nomic ex­pan­sion will sur­pass the 1991-2001 stretch as the long­est on record if the econ­omy avoids a re­ces­sion through July. In the econ­omy's fa­vor are the still­strong job mar­ket and con­sumer con­fi­dence.

But con­cerns are ris­ing that a re­ces­sion may be pos­si­ble in 2020 or even the lat­ter parts of 2019. The Fed­eral Re­serve is rais­ing in­ter­est rates — it in­di­cated two more in­creases may ar­rive in 2019 fol­low­ing four this year— and other cen­tral banks are step­ping off the ac­cel­er­a­tor on stim­u­lus for their economies, which re­move big sup­ports. And if in­fla­tion spikes un­ex­pect­edly higher, it could push the Fed to get more ag­gres­sive about rais­ing rates, which would fur­ther hin­der growth.

The In­ter­na­tional Mon­e­tary Fund ex­pects U.S. eco­nomic growth to slow to 2.5 per­cent next year from 2.9 per­cent in 2018. It's also fore­cast­ing slower growth in the euro area, Ja­pan and China.

An­a­lysts are like­wise fore­cast­ing a slow­down in U.S. cor­po­rate profit growth, though still pos­i­tive. That's key be­cause stock prices tend to track with cor­po­rate earn­ings over the long term.

Wall Street ex­pects S&P 500 earn­ings growth to drop by more than half from this year's 20.3 per­cent rate, in part be­cause com­pa­nies will no longer be get­ting the boost of the first year of new tax rates, ac­cord­ing to Fac­tSet. But the ex­pected 7.9 per­cent growth rate is still a good one this far into an eco­nomic ex­pan­sion.

It's this gain that has many strate­gists fore­cast­ing at least mod­est gains for stocks. Some strate­gists are fore­cast­ing the S&P 500 could end 2019 as high as 3,000, which would be a 24 per­cent leap from Fri­day's close.

At UBS As­set Man­age­ment, the ex­pec­ta­tion is that U.S. mar­ket could re­turn about 4 per­cent as global eco­nomic growth con­tin­ues. Euro­pean stocks could also re­turn about 6 per­cent, said Ryan Prim­mer, head of in­vest­ment so­lu­tions. But such gains would come with that one big catch.

"With higher volatil­ity," he said, "it's go­ing to feel a lot worse."

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