Outlook 2019

The crystal ball is a little cloudy this year.

With the market and politics seeing more than the normal volatility, predicting what happens in 2019 is not an easy task. In order to take some guesswork out of it, I’ll share a bit of the process I use to assess the economy and markets.

But first, a quick look at how I faired for 2018. From my 2018 Outlook post:

The big worry at the beginning of 2018 was that the market valuation was too high, and a crash was inevitable. I was one of the few writers that pointed out that P/E ratios were going down not up. Specifically:

2018 Prediction 1: Below are the projected P/E ratios based on a level 2700 for S&P 500 and consensus projected earnings and earnings growth rates from http://www.YCharts.com.

2017 – 20.54 P/E
2018 – 18.46 P/E
2019 – 16.80 P/E

Actual numbers from the WSJ: 2018 P/E (which is only through 2018 3rd Qtr.) 20.03 with Zacks full-year estimate at 17.5. 2019 end of year estimate 15.86:

2018 Prediction 2: In 2018 expect at least one 10% decline through the year, if not more. Do not be scared out. Remember that historically 10% declines are normal every year!

Actual: Two 10%+ declines for the year.

2018 Prediction 3: My feeling is that the yield curve will continue to flatten in the first half of the year with short term rates rising and long term rates flat or falling. But by the end of the year, the curve will start to normalize with long term rates reversing course and heading up

Actual: At the beginning of the year most feared rising interest rates. I was one of the minority that saw rates declining.

Now onto 2019

The first thing I always do is try and take in the big picture. A great website to do this is http://www.econpi.com. Econ P.I. looks at numerous indicators (go to their website for a full list and explanation), and plots where in the economic cycle we are based on those indicators. Below is a graph from October 2018.

Each indicator is plotted in a quadrant relative to its reading and the economic cycle. The red MOC box is the mean or average of all co-ordinates. The Green box is important as it highlights those indicators that are considered leading or predictive October of 2018 all looked good. But…

In the box above both the MoC and LD boxes have moved from the expansion to the decline quad. While still very solidly in the positive range, further movement toward the contraction quad will likely coincide with another 10% drop.

Earnings

The second step is to see if, what appears to be a slowing economy is impacting the economy. My favorite source for earnings information is from http://www.Zacks.com. Here is what the say:

“The (earnings) growth pace is on track to decelerate even further in the current and coming quarters, as we will show a little later…”

That is not good news for the stock market.

The Market

Below is a 1-year graph of SPY, the S&P 500 tracking ETF.

You can see the big drop that started in October, highlighted by the white declining line. The two parallel white lines highlight a trading range created between October and mid-December. We’ve since crashed and recovered, but seem to be heading for more movement within that earlier range. A sideways market is an indecisive market. At this point (01.25.2019) it is a coin flip as to whether the next trend will develop to the up or the downside.

What’s it all Mean?

I’ve said it before and I will continue to say it, “It is all about earnings”. Until I see forward earnings estimates adjusted up, and not down, I just see market volatility as the program traders whipsaw the market. Looking at the economic data, it is moving in the wrong direction overall. We won’t hit contraction/recession levels in 2019, but a slow growth environment is not typically one where we see rising earnings expectations either.

Bottom line: This is not a strong growth environment. Wherever the market goes during the year, at best a see a modest low double-digit return for the year, with all or most of the gain coming in the fourth quarter. Buy dividends and income until we see growth get back on track…and fasten your seat belts for more volatility. And remember,

Strategy matters – predictions do not.

Mr. DeShurko is a registered representative of Ceros Financial Services, Inc, (Member FINRA/SIPC). Ceros is not affiliated with 401 Advisor, LLC or Fund Trader Pro. The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees or affiliates.