In my RM column yesterday I noted that the combination of volatile markets and the short time remaining in 2018 demands that you converse with your financial advisor immediately. This is when you need to decide how to allocate the assets in your portfolio heading into 2019; it is imperative that you do so.
Unless your advisor has a giant crystal ball on his or her desk, planning for 2019 is not going to be an exact science. As of this writing the U.S stock market (as defined by the S&P 500) has fallen 1.8% this year. That minuscule change hides that a) the U.S markets have just entered a period of correction and b) the rest of the world has been there for most of this year.
Of the 39 non-U.S. benchmark indices that Morningstar presents on its "index performance" page, 38 are down this year--India's stock market is the only gainer. In fact, 16 of those national stock market indices have fallen more than 10% this year. So, does your advisor realize this?
The interlinkage of the equity and bond markets and of the U.S and foreign markets (for both bonds and equities) is something that needs to inform your portfolio construction at this time. It is as important now to know John Donne as it is to know John Bogle. "No man is an island entire of itself; every man is a piece of the continent, a part of the main."
There were so many stock market geniuses minted during the post-election "Trump Jump" that it made my head spin and my email inbox overflow. It turns out, though, that investing in ETFs is not a ticket to year-in and year-out gains. The markets fluctuate, and if your advisor has lost sight of that fact, it is probably time to choose another one.
As recently as Labor Day it seemed U.S stocks--especially popular mega-cap tech names like the FAANGs and Microsoft (MSFT) --were invincible owing to those companies' "disruption." If your advisor was feeding you that line of bull, you need to show him or her a chart of Netflix (NFLX) stock.
So, if you were caught off-guard by the fourth quarter's selloff, you should know that being caught off-guard is the worst feeling in investing. It's also expensive. So that you can avoid deja vu in 2019, here are my guiding investment themes for 2019. Note that each point logically feeds into the next. That represents the connection between markets and asset classes.
S&P 500: Strategists tend to rely on round figures for their index estimates, so I'll go with 2,500 as a year-end 2019 closing level. That's down about 5% from today's level.
FOMC: I believe the Fed will hike its Fed Funds target rate of 2.5% on December 19 and then stop. One and done. That is becoming a more popular opinion, too, as the CME's FedWatch tool now shows a 43.0% chance of rates sitting at 2.5% or below in December 2019. A month ago that probability stood at 19.2%.
10-Year U.S. Treasury note: I forecast a year-end 2019 yield of 2.75%, which would represent a 14 basis point decline from current levels. Risks from global economic turmoil will be more prevalent than those of a U.S recession in 2019, by my calculations. That will simply mean more flow into Treasuries from foreign buyers. Also, the continued externality in the form of the $2.6 trillion worth of U.S. Treasuries held by the NY Fed will pressure long rates. We loved QE for its artificial restraint of rates in 2012 to 2018, the market is going to hate it for the same reason in 2019.
Bank Stocks (XLF) : In the environment I just described the net interest margin pressures that are beginning to show in the results of banks and financial companies will multiply in 2019. XLF is down about 11% this year, but based on my modeling you ain't seen nothin' yet. Bank of America (BAC) in the teens? Check. JPMorgan (JPM) back to $80? Yep. Goldman (GS) : stay away! GS is already trading below book value and I see downside to $150 for GS shares with weaker player Morgan Stanley (MS) heading through $30.
Regional Banks (KRE) : KRE is down 15% this year, and in the scenario I described in the preceding paragraphs, there is much more downside.
Russell 2000: I forecast a 2019 closing level for
In that vein, microcap stocks, measured by the Russell Microcap index (RUMIC) are just too risky to touch. Frequent readers will know I love my micros and nanos, and I have styled myself as the "MicroCap Guru" in the past, but it's just too late in the economic cycle to buying lottery tickets on emerging growth names
I'm out of column space for today, but I will have more fearless predictions for 2019 in my RM columns next week.