2019 and Beyond

Okay, let’s talk.

2018 has been a tough year for equities, albeit not an unusual one by historical standards. 2018 ended pretty badly for the financial markets with the Dow Jones Industrial Average down -5.25% which begs the question, “Do you remember 2015?”

Probably not. In 2015 the DJIA was down -5.43%.

What’s the point? The point is, we’ve been here before.

Looking forward, here are some thoughts.

The stock markets are oversold. The market now trades below 15 times forward earnings estimates, which is historically cheap. Over the last 20 years, the index has traded as high as 25-26 times earnings during the mania of 1999 to briefly below 10 times earnings during the panic of 2008-2009. Consensus earnings for the S&P 500 for 2019 is $173. That’s a bit reduced from a few months ago but still 35% higher than 2018.

So with the S&P 500 index trading currently around 2500 divide that by 173 to get a P/E of about 14. (Source: Ed Yardeni Research).

Okay, so that’s one thing.

“From a year ago the economic consensus was that real GDP would grow 2.5% in 2018. And yes, that was after the tax cuts were passed. By contrast, we were more optimistic, projecting that real GDP would be up 3.0% in 2018. If we plug in our forecast for 2.0% real GDP growth [remember “real” GDP is Nominal GDP minus Inflation] in the fourth quarter, the economy will have grown 2.9% for the year. If, instead, we use the Atlanta Fed's estimate of 2.7% for Q4, we'd get 3.1% for the year.”

“Now, the same consensus that a year ago suggested the economy would only grow 2.5% in 2018 with the tax cuts is now saying the economy is going to slow down to a pace of 2.3% in 2019, in part because of the supposed reduction in stimulus related to those very same tax cuts.”

“Once again, we're not buying it. The benefits to growth from having a lower tax rate on corporate profits and less regulation are going to take years to play out. Companies and investors around the world have only begun to react to the US being a more attractive place to operate. As a result, we're forecasting another year of 3.0% economic growth.”

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
First Trust Advisors L.L.P.

Date: 12/31/2018

So what’s the point?

The point is, we’ve been through several end-of-the-world scenarios and we’re all still here.

But do remember, equity investing (in fact all investing) is wrought with risks.   If you need funds, say, within 12-24 months that money should not be in stocks. So our suggestion is that you should have at least a 5 year time horizon (or more) to be in stocks.

There’s always so much to say about a topic like this. We wanted to at least keep this a little shorter and hope it helps even a little.

Sincerely,
David & Lisa

Any opinions state are those of the author and not necessarily those of Raymond James.