2018 is history. It was a pretty bumpy year for the stock market. Today I’m checking in to share my annual review and outlook for 2019.
After delivering a big return of 23% in 2017, US stocks closed 2018 in the red.
The S&P 500 (SPY) fell 4.57% on the year. When adding a 2% dividend, the total loss came in at 2.57%.
International stocks were also weak.
The vanguard total stock market fund (VT) fell 9.76%.
iShares emerging market fund (EEM) fell 15%.
What happened in 2018?
Stocks were on a roll for most of the year before a group of powerful forces converged on stocks in the fourth quarter.
Rising interest rates: interest rates have a huge influence on the economy and stock market. In the last 18 months the federal reserve has raised interest rates 6 times to a 10-year high. This is sucking cash out of the economy, and we are seeing that weight on economic growth and trigger capital outflows from stocks. Compounding the problem, interest rates are rising in the face of slower economic growth. There are plenty of economists that would say its reckless to raise interest rates at the end of a business cycle when growth is slumping.
Slower economic growth in 2019: The global economy is expected to expand at a very healthy clip in 2019. The international monetary fund expects global GDP to expand at 3.6% in 2019. That is a very solid number – but it’s slower than last year’s 3.7%. Same story in the US. The IMF expects US GDP growth of 2.4% in 2019. That’s still very solid but down from 3.1% growth in 2018. Slower economic growth is a drag on earnings growth and stocks.
Tariffs: Bumpy relations with China are making the stock market nervous.
Government shutdown: The stock market hates uncertainty. It would rather have bad news than no news. Right now the government shutdown is a ‘no news’ situation and its making the stock market nervous.
Despite Some Speed Bumps, I Am Optimistic about 2019
Here’s the good news. There’s plenty of reasons to be optimistic about 2019. I see a lot of pessimism right now but I think stocks in 2019 could end up surprising a lot of people.
think 2019 could surprise a lot of people and
At the very top, I don’t think this is the beginning of another crash: The sell off in the fourth quarter was a little scary at times. It has been a while since we’ve seen stocks that weak. But this looks like an over due bear market. A bear market happens when stocks fall 20% or more from the 52-week high. Historically they happen once every 3.5 years.
The S&P 500 had not seen a bear market in 7 years, since August of 2011. Stocks were over due for a correction – particularity after the huge gains in 2017 and the first half of 2018.
Government shutdown will end soon: the government shutdown is going to end much sooner than later and when resolved the stock market will get a jolt higher.
China relations will be repaired: this China situation is dragging on. But it will also be fixed – I think within the next few months. Clarity on China would be another jolt higher for stocks.
The fed is calming down: the fed has recently been sending out some dovish signals to the market – suggesting it will slow rate hikes in 2019. Stocks would love that.
The global and us economies will still grow at a healthy clip in 2019: solid economic growth in 2019. No recession.
S&P 500 earnings will still grow and hit a new all-time high in 2019: Even though US corporate earnings won’t grow as quickly as 2018, they are still projected to see solid growth in 2019 and hit a new all-time high.
Investors are Bearish: investors are nervous right now. Sentiment is bearish. This is usually the place where rallies and bull markets start – under extreme over sold conditions.
So as you can see when looking at the fundamental picture this doesn’t look like a huge economic crash that is going to crush the stock market. The fundamentals and economies are holding strong and that is supporting the stock market – despite the recent pullback.
My Prediction for 2019
I am expecting to see plenty of volatility in 2019. But I think 2019 could surprise to the upside. I am seeing a lot of pessimism in the market right now and historically speaking this is where rallies usually start. And we also just saw an intense pullback. Stocks have already jumped 10% from the low and have cut recent losses in half. That shows a lot of investors were eager to be aggressive with lower share prices.
I am looking for the S&P 500 to gain between 5% and 10% in 2019.
Young Investors: continue making monthly contributions. Focus on the big picture. Use weakness as an opportunity.
Retirement Age: if the blast of weakness in the fourth quarter made you nervous, use strength in the stock market to build defensive positions in bonds and cash.
The Big Picture: 2018 was a tough year for the broad stock market and cannabis sector. But I’m optimistic about 2019.
- mike@vodickagroup.com
- mikevodicka@gmail.com
Your Investment Partner,
Mike
This report is for entertainment purposes only. Every investor should consult with an investment advisor before making investment decisions. The Vodicka Group, Inc. is not a broker/dealer. We do not receive compensation for mentioning stocks. At various times, the clients, publishers and employees of Vodicka Group, Inc., may buy or sell the securities discussed for purposes of investment or trading.
