None in the smart money camp Yahoo Finance have chatted with have a definitive reason for why stocks have gotten pounded in the often seasonally strong month of December. All the prognosticators have are a drumbeat of themes rather than catalysts, which raises the question whether stocks deserve to be in the doghouse at all right now.
Bull market haters and fear mongers trying to hawk free newsletters certainly have the hot hand. The major equity indices are fresh off their worst week since late March. December is off to its worst start for the markets since 2008. Copper prices are down 15% year-to-date. Gold prices are up 7% since mid-August (yes, gold). Bank stocks such as Goldman Sachs (GS) and Bank of America (BAC) continue to hang around 52-week lows.
Shares of mighty Apple (AAPL) are off a not so cool 27% from the October record high on worries of waning iPhone demand. But the pain for Apple hasn’t been totally done by its self-inflicted decision to no longer disclose iPhone unit sales. No doubt the U.S. recession cat calls swirling around Wall Street and the uncertain outcome of the U.S. trade war with China have weighed on what was once a trillion dollar tech behemoth back in August.
The price action in these key assets are such that a casual market observer might think 2019 will be Great Recession Lite. Tracking price action and extrapolating economic messages from it not your thing? Then take a gander at the drumbeat of bearish sell-side research ahead of next year. Most Wall Street pros have come out this month striking a very cautious tone on the U.S. economy as if four quarters of negative GDP growth were lurking in the weeds.
Citigroup’s pamphlet for clients on 2019 is aptly called “Safeguarding Assets: Building Stronger Portfolios for Turbulent Times.” One of the nine investing tips for 2019 that Citi lists is “make your cash work harder.” Whatever that means — it just sounds bearish.
Bank of America Merrill Lynch’s 2019 strategy guide kicks off with these headers: (1) There is now an alternative to stocks (cash); (2) Free cash flow is king; (3) The VIX should double over the next two to three years. Batten down those hatches, folks.
Over at BNP Paribas, its 2019 outlook bible is titled “A Change of Air.” In the U.S. equities section of the book, BNP says it sees “fading tailwinds” and a “sustained” trend higher in volatility. Look out below!
That’s just but a taste of what has been dumped in the email inbox of yours truly. Heck, even the December edition of Fortune magazine has on the cover “30 stocks that can ride out the storm.”
Is it that bad out there? What impending storm? Should an industrial giant like Caterpillar (CAT) — which is having a pretty bang up year of demand for its digging machines — be down 22% year to date and trade at a measly P/E ratio of 9.6 times forward earnings? Come on.
For every knock on the global economy and stock markets at this point in time, there are as many positives that say the bear case is being overstated.
Two quick ones…
MA activity unlikely to die: About 79% of dealmakers surveyed in a new Deloitte survey anticipate more transactions in 2019 and 70% expect those deals to be bigger than deals closed in 2018. Most bankers Yahoo Finance has talked with share the upbeat sentiment found in the survey. One doesn’t do a big merger in 2019 if they think the global economy is on the verge of a coordinated recession.
Profits still OK: Earnings growth in Corporate America will likely cool to a high single digit percentage pace (think 8% to 9%) in 2019 vs. a double-digit pace in 2018. But growth is still the highly probable outcome amid the plunge in oil prices, solid labor market and bloated cash piles that could be used to buy back stock (at cheaper levels) and pay down debt.
The market may very well have some adjusting left to do in the short-term as it deals with rapid-fire headlines on U.S. trade policy, other happenings inside the Trump White House and a less friendly Federal Reserve. But the point is fast-approaching — say by the end of 2018 — that stock prices will fail to reflect a more than decent outlook for investing next year. We are not secretly engulfed in a 2008-09 Great Recession that will get confirmed in the second half of 2019 by a government agency. We are not witnessing the reaction to another Dot com bubble bursting (Amazon and Facebook have profits, people).
Jefferies chief global equity strategist Sean Darby points out, “On the one hand, a poor earnings base effect (FY19 8.7% vs FY18 20.9% y-o-y), real interest rates flirting around positive territory and a strong dollar look set to act as headwinds [in 2019], but resilient pricing power, stable margins and improving DuPont ratios should put a floor on share prices.”
JPMorgan is on board with the S&P 500 hitting 3,100 next year. “We believe that in 2019 we will see a convergence of good macro and stock fundamentals and equity prices that were negatively impacted by sentiment and deleveraging this year (hence our S&P 500 price target of 3100),” writes JPMorgan strategist Marko Kolanovic.
Be prepared to pounce, and quickly.