January Market Review
2018 was a turbulent year in the market. After nine years of low market volatility and consistent strong performance, the markets ended 2018 with S&P 500 down -6.2% and S&P/TSX down -11.6% in local currencies.
The importance of patient capital
After a long period of consistent growth, it was unsettling for clients and advisors alike to experience a 20% correction in most of the major stock markets. As a result, I have had many conversations with clients since regarding their portfolios. I re-emphasized the importance of staying invested over the long term and not to panic during the troughs of the markets. January 2019 was a strong month, S&P 500 ended the month up 5.3% and S&P/TSX ended the month up 8.0%, both rebounded 10% from their 2018 lows.
The question at the top of most investors’ minds is the probability of a recession in 2019. The short answer is we put the likelihood of a recession for 2019 as low but I will address it in a few different ways:
GDP growth: we forecast a slower but positive GDP growth for the world economies. Our forecast for the global economy is 4.75% down from 5% over the pasts two years.
Unemployment rate: the job market is still very tight and unemployment rates remain at historical lows.
Corporate earnings: we have revised the earnings growth for 2019 lower to 6% with the S&P500 consensus earnings at $173
All of this is to say while the economy has slowed, we are experiencing growth and the likelihood of a recession is low. There are risk factors that can shock the economy into a recession, such as Fed interest rate decisions, trade protectionism and policy errors. Our base case scenario is for the Fed to gradually raise interest rate in lock step to market expectations and for China and US to reach a new equilibrium in trade policies.
What is the forecast for market performance in 2019?
The outlook for 2019 is positive but not stellar. We have experienced a long run in the current bull market. Continued growth in GDP and corporate earnings will support upward moment in the stock markets. However, as discussed previously, the engines have slowed and the slowing trend will likely continue given we have entered the late stage of the current economic cycle.
Earnings Forecast for S&P 500
Our estimate for 2019 earnings is $173, this is in-line with JPMorgan and represents a 6% growth over 2018.
Exhibit 2 Earning estimates and alternative scenarios for valuations and outcomes for S&P500 index
Portfolio Recommendations
The approach to 2019 warrants more caution in selecting more defensive stocks with an emphasis on value and dividend growth. The recent market correction has also created more opportunities in stock selection at reasonable valuations. Even though Equities still trump Fixed Income in risk adjusted returns, 2019 conversations will be more focused towards capital preservation and income generation.
Rita Li works with high net worth individuals and families to provide a high touch service in holistic wealth management planning. Her team encompasses professionals with in-depth taxation and legal backgrounds, together, they strive to deliver a high standard of service to clients. Rita is a Chartered Financial Analyst CFA® and Certified Financial Planner CFP® with expertise in asset management. Rita obtained her MBA from Richard Ivey School of Business. Contact Rita for a complimentary consultation to determine whether the services she provides can be the right fit for you and your family.