Streetwise for Sunday, December 23, 2018

Many have written but have not received a reply. The reason is that I recently had major back surgery with severe restrictions on my time in front of a computer terminal. However, as they say, I will be back in the saddle next week.

It is a most wonderful time of the year, but maybe not as far as the stock market is concerned. Yes, while there is still hope for a Santa Clause rally, things do look a little grim right now…but only if you view a glass as half empty rather than half full.

If you are not familiar with the term “Santa Claus rally,” it refers to a rise in stock prices during the last couple of weeks of December and the first two weeks of January. The Santa Claus rally, also known as the “December Effect,” was first recorded by Yale Hirsch in his Stock Trader’s Almanac in 1972.

Looking ahead, my expectation is that the ongoing bull market will continue well into next year, resulting in an awakening of the animal spirits within both institutional and individual investors.

Wait you say, how is that possible. If you had the opportunity to glance at the current issue of Barron’s, a relatively unbiased and highly thought of investment publication, the cover article read, “Why Stocks Could Rise More than 10 Percent in 2019.”

While many investors are ready to writ-off 2018, a year that chalked up two stock market corrections, rising interest rates, an ugly trade war, and growing fears that a bear market lies just around the corner, the thunder clouds may already be dissipating.

Barron’s pointed out that as the major equity indexes stumble toward what could be their first yearly loss since 2015, next year is looking rather sunny. In fact, many analysts have 2019 targets for the S&P 500 index that are higher than the benchmark’s recent price level of 2600. Based on the consensus’ mean prediction, the S&P 500 will end next year at 2975, indicating a gain of more than 14 percent.

Nonetheless, the stock market is down almost 3 percent this year, as measured by the S&P 500-a disappointing showing in any year, but especially so after last year’s nearly 20 percent gain.

Could 2018’s downdraft signal next year’s earnings moderation? Barron’s prognosticators expect S&P 500 profits to rise between 5 and 6 percent in 2019, to $172 per share. Industry analysts, who typically have loftier forecasts than “top-down” strategists, anticipate per share profit growth of 9 percent next year. 

Moreover, I am cautiously optimistic that the U.S. and China will reach some sort of trade agreement early in 2019, ending nearly a year of friction that has weighed on stocks.

The market’s tumult this year has left stocks trading at about 15 times the next 12 months’ expected earnings, in line with the long-term average. That’s well below the S&P 500’s price/earnings ratio of more than 18 on Sept. 20, when the index hit an all-time high of 2930.

Rising interest rates get some of the blame for trimming valuations. However, concerns about multiple rate increases have declined somewhat. Meanwhile, Treasury yields have remained relatively low. (Bond yields move inversely to prices.) The 10-year Treasury yielded 2.4 percent at the end of last year. He current number is about 2.9 percent. 

Look for 10-year Treasuries to yield 3.1 percent next year. At the same time GDP growth is likely to be about 2.6 percent in 2019. While that’s below 2018, it’s above the rate in 2016 and 2017.

Note to Readers – Save the Date: I will be teaching Advanced Investment Analysis, starting Monday, January 14, for the Ringling’s Osher Lifelong Learning Institute. Call 941-309-5111 for registration and information. About 14 seats left.

My 9th annual talk sponsored by the non-profit American Association of Individual Investors (AAII), titled: “Tactics for Tough Times – Deciphering Wall Street in 2019”, will be on Thursday, January 24, at the Hyatt Regency, 1000 Blvd. of the Arts. Registration/Social/Refreshments 3:30 P.M., Program 4:00 to 5:30, Q&A 5:30. Please call 941-706-3449 to register. $15 per person at the door.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddInternational.com.