2018 gave us an amazing snapshot into the volatility, resiliency and overall function of the stock market. With a historic drop in the first quarter before a recovery and then a series of corrections and rebounds, one year saw decades’ worth of market moves. At the end of it all, 2018 was the worst year for the market in 10 years, while still seeing plenty of gains across all sorts of industries.
This is why we never count the stock market out and I advise everyone not to cut and run when things look dire. You should diligently manage and adjust your positions, but the bad times always have better days following close behind. You don’t have to guess right on every investment, you just have to stay relatively informed and keep your eyes on the prize.
Staying informed means different things to different investors. Some people like to get every detail on individual companies and pounce when they think the time is right; others prefer a broader scope, moving on shares that meet certain criteria even if not much is known about the specific company. You can create spreadsheets and read tea leaves,whatever makes you feel good about your investing choices. There are no strict rules when it comes to trading, so you get to study as much or as little as you wish.
Of course, I want you to educate yourself as much as possible and make informed decisions. Since it’s hard, if not impossible, to predict what any one stock will do, I’m a big proponent of looking into market trends. Learning about historical trends while going over current financial influences helps you see the big picture. It’s easy to get caught up in market minutia, which often leads to ill-advised purchases;studying stocks from a distance can keep you from chasing bad positions or making too many moves and racking up too many trading fees.
Whether you’re looking at local industries or emerging foreign markets, these trends and expectations for 2019 should factor into your decisions. There will be plenty of exceptions to the rules, but the following five indicators will invariably help in your market research.
No one has gone into full panic mode over this, but there’s widespread agreement that we’ll see a drop in earnings through the year.
Across all sectors of the economy, from Pepsi to Citigroup, subpar 4th quarter numbers led to subdued predictions for upcoming revenue. As quarterly earnings reports come in, those will have a swift and notable effect on trading. And, while we wait for those reports to get released, share prices will adjust based on the expectation.
What is the expected drop? Depends on who you ask. Some analysts think there will be a full earnings recession, in which we see consecutive quarters of negative year-over-year growth. Most Wall Street think tanks expect to see upwards of a 10% decline in earnings per share from 2018 to 2019, and those predictions have already moved the needle to a certain extent.
Oddly enough, expectation affects stock prices as much as the actual rising and falling of earnings. If earnings drop by something like 50%, stock prices would probably go up if the expectation had been a 60%. If the decline is only 10% but the prediction had been 5%, you could expect the Dow and S&P to take the news poorly.
If it’s true that expectations matter more than the actual data, that means slowed earnings growth shouldn’t scare you away from investments. On the contrary, negative quarterly data typically leads to short-term price drops; once people finish panicking, prices will even out and continue rising. As I mentioned, Pepsi had a bad quarter to end 2018. If you have an opportunity to get discounted shares of a company that’s a household name across the globe, don’t run away from that opportunity.
When earnings go down, strong reactions will follow. Feel free to react, but don’t go nuts and start burying cash in the backyard.
After four rate hikes in 2018, the Federal Reserve plans to adjust just twice more in 2019. Because the markets got so finicky last year, push back from banks, business owners and legislators has the Fed indicating that interest rates will move less aggressively in 2019.
Increasing interest rates start by influencing banks’ lending and borrowing rates, and that slowly ripples out and affects all sorts of financial matters. It takes some time for all the dominoes to fall, so we usually don’t see the true effect of a rate change for 12 months or so.However, expectation is everything when it comes to the markets, so a breeze ruffling the Fed Chairman’s hair could result in millions of dollars being made or lost.
Higher interest rates, which we’re still adjusting to after the last hike in December, are part of the reason we expect to see lower earnings. Interest rates also curb expansion when borrowing becomes too costly for small and medium companies, and even some of the larger corporations. As this process unfolds, stock prices tend to fall.
However, share prices don’t drop indefinitely.If the Fed were to skip rate hikes throughout 2019 altogether, we wouldn’t see a continued reaction to the .25% increase from last December. Banks and investors will slowly adjust and, as growth picks up pace, the borrowing will see an uptick as well. And, if the assumption is the next move by the Fed would be to raise instead of lower the prime rate, banks will look to borrow more before that increase gets announced.
Despite what you’ll hear from certain voices in the financial sector, the Federal Reserve is not the villain in our story.Excessive inflation hurts the markets just as much as soaring interest rates,and the sting of inflation typically lasts a lot longer than a rate bump. While companies might tighten purse strings a little because of money lost to APRs,that alone won’t tank the stock market. It can influence how quickly you move to refinance your home, but it certainly shouldn’t be the catalyst for you emptying out your IRA.
A year with limited rate hikes and continued economic growth could mean good things for certain stocks, but it’s all relative to the company and your timing. Keep an eye out for announcements from the Fed and see how those time out with the release of earnings data. Those two factors might work together to push the markets sharply in one direction or another.
There’s no denying the last couple years have been exceptional for growth stocks. Since the housing crisis, the market has grown over 300% and a lot of that fuel came from growth stocks. Now, on the heels of the worst Dow performance since that brutal 18-month stretch around 2008, analysts see a steady move back toward value stocks and long-term holdings.
Many of us never let value stocks fall out of favor. Unless you’re managing portfolios and looking to make constant moves,it’s essential to have a good mix of slow-growth stocks. For more casual investors and those who bank on current trends, 2018 was a reminder that companies don’t always grow.
Value stocks always become a favorite when a bear market threatens, so you may have heard increased value chatter over the last year. It doesn’t seem like we’re heading into a long-term correction, but few people think the declines seen in late 2018 were the exception to the rule.Hedging toward value in anticipation of more setbacks makes sense to a lot of investors.
You’ll find value stocks in a variety of industries:
● Real estate
One of the best indicators of value is a big company with strong earnings and a somewhat inexplicable decline in stock price. Both FedEx and AT&T had rough years from a market perspective while maintaining their positions as industry leaders. While shifting economies can always lead to big changes, it’s hard to imagine either of those businesses going under any time soon.
I agree with the logic behind moving on value stocks in the current market, but I also want you to understand that this trend has a catch 22 element to it. When the majority of investors take value positions, those share prices increase and the value takes a small hit. It’s less of a problem with long-term investing, but it’s always nice to move early on undervalued shares. For this exact reason, you should target these slow and steady companies at all times, not just when it’s on trend.
Long viewed as the darling of investors, tech stocks lack the sheen that once made them the belle of the ball. I’m not saying abandon all investments in the technologies sector, as that would more or less constitute lunacy. However, I do think people need to show a little restraint before adding a dozen tech startups to their portfolio.
Part of the reason is that tech, for the same reasons that make it such a big winner, can end up being a trap bet. Limited overhead and unknown possibilities turn good ideas into appealing stocks, but those same companies can fold in a heartbeat when they underperform market forecast. Remember all that stuff about expectations dictating prices? Tech stocks get hit by perception as hard - if not harder - than other industries.
Even now, as the tech sector has seen gains after a brutal 4th quarter in 2018, public perception remains skeptical. Issues with security and transparency have people feeling antsy, and those reactions trigger more reactions and suddenly everyone’s living through a brief sell-off.The majority of established companies will come out fine on the other side.Certain businesses in more precarious positions won’t fare as well.
We also have to watch what’s happening with China to understand where tech is headed. This part has less to do with U.S.-China trade and more to do with China’s own economy, which has an undeniable influence on tech stocks. Whether it’s supply or demand, the Chinese markets have the ability to tip tech scales fairly dramatically.
If growth doesn’t pick up in the coming months, we could see a bit of a relapse for technology stocks. While Oracle and Amazon and Facebook have all rallied since the end of 2018, they haven’t returned to previous record levels and could easily slip again if other sectors lose investors’ confidence.
As always, volatile stocks can present excellent opportunities. If tech takes a hit and great companies see share prices go down, that might be a good time to buy low. Technology typically falls into the growth category, but it’s not unheard of to get a little value out of a digital company.
After a recovery, people invariably start looking for signs of the next economic downfall. Starting in 2015, as a result of slowing GDP in China and petroleum prices dropping significantly, economists started combing through data in search of indicators of another financial crisis. Here we are almost four years later, crisis so far averted, and people are still looking.
The market ebbs and flows, and that volatility is part of its overall strength. If stocks stayed on a constant upward trajectory, the money generated would essentially be worthless. These peaks and valleys are to be expected and respected, and spending too much time planning for the bottom to drop out can cost you in the long run.
What does a recession actually mean for your portfolio? If you look at the crash in 2008, 10 years later the market had quadrupled in value. Anyone who was day trading on September 29 of that year probably lost their shirt, but anyone who had an IRA then and has the same IRA now likely enjoys a healthy retirement account. You might adjust a handful of positions, but the richest investors look at plummeting share prices as a great time to make money.
Instead of listening to pundits talk about when the next recession could hit (which is all conjecture to begin with),think about causation and how industries might react. With the mortgage debacle, banks and lenders took a massive hit and alternative lending platforms rose from the ashes. If housing prices deliver another economic misstep, what suppliers, manufacturers and financiers might be best equipped to avoid big losses?
I’m not in the business of predicting a collapse, so I’m not going to jump on the reactionary train and point to specific stocks to buy in case of an imaginary recession. That would be a disservice to us all. I’d rather you focus on the market as a whole, filtering out the noise about pending catastrophes and bankruptcy. If your investing strategies are rooted in fear, it’s going to be hard for you to capitalize on opportunities as they role around.
You’ll notice a common thread in all these trends: to an extent, each of them has a dependency on expectations and predictions. Even when companies deliver solid earnings, stock prices can drop if those numbers fall short of projections; traders buy and sell based on what they think the Fed will do, they jump at value stocks when growth is predicted to slow, they lay off tech based on analytics relating to last year’s data.
While this information is all valuable and clearly has a propensity for affecting the market, expectation is almost always a short-term influencer. Trends, by and large, relate to short-term market strategies. They can’t be ignored as you balance your portfolio and track global economics, but you also need to see each trend for what it is.
Hopefully this information helps your 2019 investing. Most of all, I hope it helps alleviate some of your fears about investing in 2019.