Have we seen the bulk of the move forward in 2019 already, just one month into the year, or are we instead poised to have a better year than this and end up higher?
After stock markets experienced a pretty tumultuous ride over the last 4 months, starting with a precipitous drop in late 2018, followed by a strong recovery so far this year, this has left many investors unclear as to what stock markets may be headed next.
Some people see the 20% correction that was laid at our feet in the final quarter of last year as being just a temporary consolidation as the markets digested the effect of a slowing economy, particularly in China. If that was the case, it does appear that we have accomplished that and the reversal that we’ve seen over the last few weeks adds a lot of support to this view.
Others believe that this resurgence is the consolidation, where we’re on the move down and this latest move in the markets consists of our eagerness to seek out bargains, with the recent dip presenting buying opportunities that many have taken advantage of.
When you get a pullback with a bull market, these declines can be seen as either foretelling the future or a break in the action where those who are eager to sell at this point move out. If the longer-term trend is in the other direction, in this case up, this can provide opportunities to further ride the bull while entering at discount prices.
This is how institutional investors think, and institutions aren’t too bothered by temporary moves, and even can look the other way with pullbacks as big as the one we just saw, provided that it actually is temporary. If the mood on the street is that this is the case though, then this buying of dips can actually help perpetuate the recovery by putting upward pressure on stock prices.
Getting back to where we were in early October is psychologically important to the market, and not without good reason. If we can get back to where we were, then this can be easily seen as putting the bears that came out once this selloff got underway to bed, where we can then look ahead to expectations of continuing the longer-term bull run.
Which Scenario Is More Likely to Happen?
The trick is to decide which scenario we’re on, the pause in the bear move or the recovery from it. It’s safe to say at this point that we have put together a real recovery here, although how long it will last or how far upward we will go in 2019 is a more difficult question.
Strategists at Goldman Sachs are coming in somewhere in the middle of this debate, where they don’t see us retesting the December lows, nor do they expect much more of a move away from them then we’ve already seen.
Part of their prediction has already come to pass, somewhat accurately anyway, the part that believed “a modest bounce early in the year was likely.” We may not want to call this a modest bounce though, given that we’ve already recovered the lion’s share of the selloff that started this whole conversation, as a modest bounce would usually refer to getting back a relatively small percentage of the original move, not most of it.
Goldman also tells us that this bounce would represent “the bulk of returns for the year”, and looking at the situation now, they believe this to still be the likely scenario and outlook for 2019. “The rally we expected has happened swiftly, and given this we see relatively modest returns from here.”
Predicting this rally was a good call indeed, although we may want to question whether the bulk of the returns for 2019 have already been put in. There are reasons why this might be the case though.
We’ve seen a return to optimism with this recovery, although we really haven’t seen the conditions that inspired this selloff go away or even improve that much. This is a market-driven recovery essentially, although markets are really driven a lot by sentiment so this should not really be too alarming and actually is quite encouraging, seeing current conditions not really dampening the mood of the market too much.
When we look to the start of last year though, we do see a nice rally in January again, followed by a year where we bounced up and down but never did get back to those January levels, and finished the year with a net loss.
January was followed by a rough February though, and it actually only took three trading days to give back all of the 13% gains that we put together over the previous 10 weeks. It was felt at the time that the market was overbought, and when that’s the feeling, this usually translates to a pullback of some sort, and we sure saw one then.
This Year is Shaping Up Differently, So Far Anyway
We really don’t have that issue to deal with this time around, at least not to the same extent we did in February 2018, and the tables have turned perhaps, where we put together this rally with a view of the market being oversold by way of how far we came down from the all-time high a year ago.
We’re a lot closer now, less than 1400 points with the Dow for instance, but if we do manage to approach that number, we might wonder why we are fit to challenge all-time market highs with the economy and other significant issues still out there.
We can say without any doubt that there is some resistance at this upper level now, given that we’ve been at it twice and in both cases, not only did we fail to go higher, we immediately experienced double-digit pullbacks. While this might not happen the third time around, we could see a reversal of a lesser magnitude, serving to stymie attempts to get past this resistance point.
When we look at the whole picture, Goldman’s forecast for 2019 does not seem unreasonable at all, and if we had to pick the most likely scenario, we may have to face the fact that doing better than gaining another 5% and making it back up to where we once were might be the best we can hope for, and may need to settle for less.
If this happens, this would indeed mean that the rally of the last 6 weeks may have delivered the bulk of the returns we may expect in 2019. This does not mean that doing better than this, seeing us surpass the highs of last year and beyond, isn’t on the table, but we’ll at least need to see some real changes in the overall outlook, putting in modest growth without the Fed intervening too much to slow it down for instance, as well as a better resolution of the trade dispute with China.
It actually may be too soon to tell all that much about where we’re likely going in 2019, and any attempts right now to decide this is going to rely more on guessing than anything, even though the guesses may still be some pretty good ones.
How we handle the next wave will tell us more, when this recovery eventually cools off. The spirit of the market with this recovery has been very strong, but we still need to see how they handle starting to give some of this back and see just how firmly planted the idea of moving forward in 2019 actually is.