Strong Nine Months, Terrible Ending

One of the key features of this past year was the mismatch between market challenges for investors in almost all markets and all geographies, set against the backdrop of still-robust global growth. The U.S. GDP and S&P 500 earnings each expanded at their fastest pace since 2011 on the back of tax changes and fiscal stimulus, and ISM readings pointing to continued health. Corporate revenues and margins topped expectations throughout the year on strong company fundamentals. Despite the positive economic backdrop, the S&P 500 finished down -6.2% for 2018 (excluding dividends), the worst year of the post-crisis period.

This seeming conundrum can be largely explained away by noting that markets were consistently under pressure from trade tensions, a wave of geopolitical concerns (e.g., North Korea, Iran, Brexit, Italy), and steady Fed rate hikes, along with quantitative tightening. Also, lurking beneath the surface of these concerns is the broader context that global growth is grinding slower and markets are looking ahead to even cooler activity in 2019. This made for a significantly more challenging market environment in 2018 compared to the global synchronous growth of 2017. The market held up nicely for nine months, posting a 10%+ gain on the year before plunging 20% into the Christmas holiday. This shift in sentiment contributed to the sharp decline in multiples from 18.2x at the end of 2017 to a more historically average 14.4x today.

The key issue will be whether the end of the economic cycle is getting closer. The current U.S. expansion will become the longest on record if it continues into July 2019. We think that record seems likely to be reached since none of our key leading economic indicators are flashing danger. In that context, for now we view this selloff more as a healthy retrenchment in investor sentiment rather than being indicative of an imminent collapse in the U.S. economy.

Gainplan’s Market Predictions That Are Absolutely Sure to Occur in 2019

The longer I am involved with the markets, the less respect I have for predictions. Predicting some future event and then crossing your fingers and hoping it happens just doesn’t produce superior results. If you are going to make predictions, you have to develop a strategy to deal with changing conditions.

The most useless predictions of all are the annual end-of-the-year predictions from analysts and pundits with price targets for the end of the year. There is no strategy, no thinking, and no discussion about the inevitable volatility that will occur. However, many like to play this prediction game. It is entertaining to see if you might get lucky, much like playing a slot machine, and of course you can brag if your guess turns out to be close.

I readily admit that I don’t know where the indices will be a year from now. In fact, I avoid even thinking about it as I believe it is counterproductive to create a market bias. I want to be as open-minded and reactive to changing conditions as possible, and being attached to some sort of market prediction undermines those efforts.

My negative view of predictions seems rather grumpy and negative, so in the spirit of the season, I want to offer some predictions which are absolutely, positively sure to occur in 2019:

1. There will be at least two big rallies and two nasty pullbacks in the major indices during 2019. I don’t know when, how, or why these moves will develop, but there will be some very tradable volatility.

2. The best performing stocks in 2019 will be small caps that start the year trading under $20. The worst performing stocks will also be low-priced small caps.

3. The bulls will be viewed as naïve goofballs that fail to appreciate the disasters that await. The bears will be viewed as pragmatic intellectuals with great insight even if they are wrong.

4. There will be very hot sector trades similar to what we have seen in the past with blockchain, bitcoin, marijuana, solar energy, heavy metals, internet stocks, etc. “Expert” bears will advise us that the highly speculative trading is stupid and won’t last, traders will make good money, and “true believers” will get killed.

5. The Fed or the President, or both, will be blamed if the market does not go up.

6. We will find some great security selections, and some not-so-great ones, but if we stay disciplined, we will do well.

Happy New Year!

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