Welcome to the last in my series of columns on the year ahead. In my four earlier ones, I covered why December was lousy and why stocks are on the right side of a swift V-shaped recovery. U.S. stocks have climbed more than 10 percent since the market close on Christmas Eve. Accompanied by wild wiggles, the rest of 2019 should be similarly happy.
On December 17, I explained how stocks’ have averaged 34 percent before dividends in the 12 months after all of history’s correction bottoms (meaning a drop of 10 to 19.99 percent in the Standard & Poor’s 500 index).
Assuming December 24 remains the bottom, this correction ended later in a calendar year than any correction or bear market ever. An average aftermath now would make 2019 simply stellar, and surprise almost everyone. That’s bullish.
Maybe December 24 wasn’t the bottom. We can’t know for sure. But there were abundant bottomish signals. Mutual fund outflows reached levels only associated with major market bottoms. December outflows matched March, 2009, when the last bear market ended. U.S. stock market liquidity sank like a brick, also echoing prior lows.
Price-to-earnings ratios contracted last year – earnings soared while stocks fell. A simple secret: Basically every year valuations shrink, the next year they expand. So unless earnings fall, stocks rise. Analysts expect 6.9 percent earnings growth in 2019. Earnings almost always exceed analysts’ estimates. Expanding valuations on top of earnings growth would cause big positive stock returns
Good years follow bad years unless you have global recession or world war. We’ve never had two straight negative stock market years – except with the Great Depression, the two World Wars, the early 1970s debacle and the tech bubble. Otherwise, stocks were spring-loaded the next year.
And recession is unlikely. I showed you exactly why last week via the Leading Economic Index series – a great predictor for this.
Many misguided people still think the interest rate “yield curve” inverted, signaling that a downturn lurks. I explained on July 22nd why that is wrong and how to view it correctly to see reality.
But, suppose it were inverted. So what?
History holds four examples of the yield curve inverting without a recession the next year. Stocks rose every time, averaging 16.6 percent that next year. Since inversion fears are now in the marketplace – that’s big potential upside surprise, and bullish!
The government shutdown flooded folks with fear. Yet it shouldn’t. The aftermath of shutdowns is also great, with U.S. stocks averaging 12.8 percent in the next 12 months.
Sure, shutdowns must end to have an aftermath. But shutdowns themselves aren’t bearish. The prior 19 shutdowns occurred while markets were open. Stocks rose during 11, including 1995-1996 – the longest shutdown before the current one. Now people worry this one’s length will cause problems. But U.S. stocks, a leading indicator, have risen over 8 percent since it began. They’re telling you not to worry.
Everywhere I look, sentiment seeks negatives, ignoring positives. Did you know global lending and money supply are growing around 6 percent year-over-year? That the global purchasing managers’ index is higher now than during most of 2016, a fine year for stocks? That world trade is growing nearly 4 percent year-over-year despite this supposed trade war? That global profit margins are too?
If you didn’t know any of this, you aren’t alone. Most good news goes unreported or gets couched as bad – a phenomenon I call the pessimism of disbelief. When it strikes, better times are ahead.
Next week, I’ll share some timeless investment process wisdom to help you put all this into practice.
