The anticipation of a recession has been building up. The characteristics found in the 2019 stock market calendar have been an indication that there is not much movement recently. The Federal Reserve continues to encourage investment even though the U.S. economy does not seem to need it.
The pessimistic and optimistic perspectives of investors have driven the crowd consensus to a lukewarm view of the market. Stocks are found to be inexpensive, in contrast to bond yields, but they are also not cheap with forecast earnings close to 17 times its original prediction.
Equities have been held in check by the deceleration of the global economy, and the lowering margins in corporate profit. Despite the expectations of a recession, the returns realized by investors on the global bonds are low, and consumers of the United States strengthen valuations in stock.
S&P 500, like similar broad markets, has been found in somewhat of a standstill with only a 4 percent increase at roughly 3000 since its crest last January 2018. Investors have not forgotten the previous year’s drop of 20% even though a rise of 20% was found since the start of the year. The economy of the U.S. is not experiencing any blows; however, the Federal Reserve will potentially offer to cut rates thrice this year. The ripe economic activity may present a recession, but there are no prominent warning signs for its sudden arrival.
The stock market’s last few months of 2019 will depend on how the investors will interpolate from the observations in the characteristics of the calendar, crowd consensus, and corporate credit. This leads to a heated discussion on the ability of the market to reach greater heights. Among many factors, three have been found to play a significant role in knowing how Wall Street will fare in the coming years.
- Seasonal Characteristics
It has been generally known, throughout most of history, that as the end of the year approaches the statistics show an increase in the market. Last year came as a surprise with a 20% loss in the final three months of the year due to severe liquidation the market had to endure reluctantly. By the end of September 2018, the S&P 500 had increased by 10% since January. The market expected to continue its ascent through Christmas Eve.
Common sense and rules of thumb for year-end predictions had gone awry. It was not just the expectation of stocks to do better during the months leading up to Christmas, but the statistics that have shown regularities in the comprehensive data that shows markets improve towards the end of the year. Discussions on the seasonal market indicators are now open to more doubt, mainly due to the ordeal last year. However, chances that the market will hoodwink investors again this 2019, a pre-election year, seem to be pretty slim.
- Finding Consensus within the Crowd
Measures on the overall attitude of investors and their positions claim to see the market climate seemingly tamed, with the S%P 500 about to reach its highest record. Behaviors of investors changed after suffering sudden drops in growth worldwide, withdrawal in stocks last August, and the surge for low treasury yields.
The risk-reward potential in stocks inclines on growth as October fell into an extreme pessimism zone according to the Ned Davis Research Monthly Trading Sentiment Composite, which tracks the indicators. Retail investors continue to buy bonds despite a decrease in yield bonds. They also have sold equities in the market, unfailingly throughout the years. Income during retirement and safety are the top priorities of the older generation over the valuation of capital. This situation suggests the change in demographics and its effects on the market economy. Inflating stocks does not pose as a problem due to the absence of willingness to buy capital.
The Bank of America Merrill Lynch agrees with this verdict, as shown in their tallies of net flows across different types of assets, weekly. These net flows move into cash and bonds from stocks.
Following the behavior in the bull market, investors do not seem to make a greedy claim for stocks that can inflate the economy; and this presents a positive outlook for 2019.
- Credit in Corporations
Corporate debt-markets are known to be risk-averse. Credit does not pose any dangers, especially since the Federal Reserve continues to insure it and the worldwide need for income to be reliable.
Industrial production should start seeing an increase as hinted by the Citigroup strategists due to the unrestrictive standards of acquiring commercial and industrial credit shown in the Fed’s bank survey. There is a steady risk spread demand for BBB-rated corporate debt by investors. Lower rated issuers should not fear the scarcity of money as no significant data has been found in the investment-grade world for it to happen.
Credit is found to be keeping up, ceteris paribus. It would not cause a dilemma in the potential of stocks to advance.
The economy may have other factors to worry about, i.e., uncertain fights in the trade market, boundaries in the debt market, flattening global leading growth indicators, stillness in earnings-growth, concerning incidents in the repo-market, and yield-curve inversions; yet the Fed is seemingly about to give another cut, strength in these defensive sectors and low yields in bond may carry the economy now.
Through all these issues, stocks have remained elastic, but these warnings should not be ignored. Wall Street may be able to reach an all-time high before an imminent recession comes, but due to the improved economic structure, it might take some time for the bear to take down the bull.