Several Indicators Indicate More Market Upside in 2019
In today’s relatively uncertain economic environment, people are lining up on each side of the debate on where we’re headed next. There’s good evidence though that it is upward.
The slowdown of the economy that we are facing has caused a lot of disagreement among market observers as to what 2019 may end up looking like. There are times where there is more or less consensus on the near-term direction of markets, when we’re in a clear bull or bear market, but the current conditions are less uncertain, resulting in a division between the more bullish observers and those who hold a more bearish outlook.
Those who have been predicting the end of the bull market and felt vindicated by the fall in prices we saw in late 2018 have had to re-assess their positions, but many still feel that we are not out of those woods yet, and that the current market rally is just a pause in the bigger downward move.
As we move closer and closer to overcoming this setback of 2018, and with all-time highs closer in sight, the bearish view does become diluted by the facts to some extent, but there’s still 10 months left in the year and a lot can happen over this time. We have started out 2019 with an 11% gain, and an even bigger one if we count the last trading week of 2018, but it’s still early in the game.
While there are some concerns out there, particularly ones involving the economy slowing down, none of this has been bothersome to the market, which has forged ahead in spite of all this. From this, we can reason that the net outlook remains positive, and something worse than what we have seen or what we expect would have to surface to get us off of this move and propel us in the other direction.
It is important though that we stay on top of these potential changes, and if it’s the economy that we are looking at, there are some things that we can look at to get an idea of where the longer-term trends may be pointing, especially in reference to correlations between these indicators and market performance.
These indicators are often far from conclusive when looked at in their entirety, as we often will see mixed signals, and the trick is to distill the overall picture and see what is more likely to happen.
Some observers not only are seeing an end to the long bull market we have enjoyed since the last recession, they believe that we are headed for another one, which will put the hurt on both the market and business.
We Need to Look at Certain Signs That May Be Telling
Slowdowns in growth rates can indeed be telling, and trends here are to be taken seriously, as all trends need to be, but whether a certain trend continues or not is not a foregone conclusion and can’t always be deduced by just looking at the trend. In order to understand what the likelihood of it continuing on may be, and how far it might go, we need to look at other things.
Thomas Lee of Fundstrat Global Advisors has recently shared his thoughts with us on this, and his outlook for 2019 remains positive. Looking back into the past, he has found that when the market sells off 19% or more within 60 days, as it did late last year, the market rebounds by 15% on average over the next 6 months and 20% over the next 12.
We’ve already seen the first leg of this already happen, and a further 5% in 2019 does seem to be pretty realistic if things continue on as they have. Markets are influenced by more things than just history though and, for instance, if we get a market friendly trade deal between China and the United States in place soon, this may be the low end of what we may expect.
He also refines this analysis to include situations where this decline happens in the face of the purchasing index being above 50, which is the case with our current situation, and in these cases, the ensuing rebound averages 31% over the following 12 months.
In order for a pullback to have enough momentum to go deeper into the red, we really need some fundamentals that are worse than what we have faced and are facing, otherwise we can just see the downward movement as a correction in the midst of an overall up move, something that appears to be the case thus far given how we’ve recovered from it.
Lee also tells us that market and economic indicators are telling us that we are in the midst of a business up cycle rather than at the end of one, as some think. One of the things we look at in deciding what stage of the business cycle we are in is the percentage of GDP of private investment, which stands at 24%, with 27% being considered the mid-point of the cycle.
This one isn’t particularly compelling, but it does add weight to the idea that there still may be some room for growth even though this current business cycle has been going on for quite a while now and is at least showing some signs of tiring when we look at things like quarterly GDP growth.
GDP Growth Is Actually Expanding Year over Year
The GDP growth numbers for the fourth quarter of 2018 just came in, delayed by the U.S. government shutdown, and they are down for the second quarter in a row. On the bright side though, the yearly numbers are on the rise, moving from 1.6% in 2016, to 2.2% in 2017, to 2.9% in 2018.
The yearly numbers do not point to a slowdown at all, but instead, an economy that has regained the momentum it lost the previous two years, and we have to go all the way back to 2005 to see a number larger than this. While some may be put off by the quarterly results, the annual results can be seen to mean more as they involve more significant periods of measurement.
Worries about slowdowns are also manifest in bond spreads, which seek to predict future economic trends. When the yield curve inverts, meaning that yields for shorter term bonds exceed that of longer-term ones, this indicates real trouble, but Lee points out that we are far from an inversion, and therefore, this indicator does not suggest a pending recession.
In order for things to really deteriorate, Lee believes that “global economic conditions would have to be as fragile as they were in the 1980’s, which was plagued by double digit inflation, commodity supply shocks, double digit unemployment and hawkish central banks.”
While we may not need anything like this to quell the overall bull market, this does remind us a bit of the scale that is generally needed for such a fall, and it’s hard to imagine that the present concerns are anywhere near the scale we normally see, which includes a collapse of the housing market and the ensuing losses and negative growth that the last one laid on us.
Lee also tells us that the biggest risk to markets these days is not the economy but the potential for mistakes by the Fed, by their looking to reign in an economy when this is not really required. That does remain a threat, especially given that some Fed members are considering a rate hike, but for now that’s not on the table yet. As long as this current economy is left to grow on its own, things are looking pretty decent at least for us to continue to move forward this year.
Editor, MarketReview.com
Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.
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