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Why It May Be Downhill From Here for Stocks in 2019

ForexJul 07, 2019 02:40AM ET
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© Reuters. Why It May Be Downhill From Here for Stocks in 2019

(Bloomberg) -- Summertime and the livin’ is easy, right? The market is near a record, President Donald Trump delivered a nugget of good news on the trade front, the labor market is thriving and the Federal Reserve is at least considering a rate cut.

And for all that, few of Wall Street’s denizens sound particularly optimistic.

Professional prognosticators often dance to the same tune but what’s unusual now is how glum the music has become of late. With $5 trillion added to equities already, pessimism pervades second-half forecasts. It will be hard to sustain the advance, they say -- the market can’t defy gravity forever. And freakish June, when just about everything rallied, won’t be repeated.

“A lot of the gains for the year have already been booked,” said Arthur Hogan, chief market strategist at National Securities Corp. “We’re up 19% in the first half of this year in the S&P 500, it’s a great start. I don’t think anybody supposes we’re going to annualize that number.”

Hogan is right -- it wouldn’t be so awful if the rally ended now, with the S&P 500 having just posted its best first half since 1997. In the holiday-shortened week, stocks rallied to records and bonds surged on the expectation the Fed will cut rates at its July meeting. But a stronger-than-expected jobs report on Friday clouded the case for easing, and the S&P 500 retreated 0.2%.

Concern about the economy and trade won’t go away. Negotiations between the U.S. and China may be set to pick up, but little else has been agreed to following the Group of 20 summit. Last week’s promises sounded good, but investors are realizing there’s been a shortage of new news -- and that doesn’t bode well for calm.

“Investors are slowly but surely becoming a little bit numb to ‘We’re almost there’ because we’ve been told ‘We’re 90% of the way,’ and it never really comes to fruition,” said Shawn Cruz, manager of trader strategy at TD Ameritrade. “Eventually you’ll find it harder and harder to make new highs.”

Nobody is rushing to revise year-end S&P 500 targets higher. The majority of those surveyed by Bloomberg expect the S&P to end at a lower level than it’s at now. Forecasters at RBC, for instance, reiterated a year-end S&P 500 target of 2,950, about 1.3% below current levels. Citigroup (NYSE:C) maintained its 2,850 target, and both shops warned rallies won’t be sustainable. Jonathan Golub at Credit Suisse (SIX:CSGN) recommended “cautious positioning” given the decelerating environment.

To be sure, 2019’s surging markets have raised hopes among many investors for truly huge gains such as those enjoyed in 2013 and 1995, when the S&P 500 rallied around 30%. While big gains through June obviously don’t hurt that case, they come nowhere near guaranteeing it. Out of 10 times when stocks rose 15% or more in the first six months of a year going back to the 1950s, more gains happened about half the time, according to research from LPL Financial.

Weakness is normal after a big start and pullbacks tend to be more severe, the firm found. That could mean stocks could finish the year just a few percentage points from their current levels, according to LPL.

With stocks hovering near spots where past rallies failed, many say it’s time to take profits or re-position. JPMorgan Chase & Co (NYSE:JPM)., for one, is advising clients do just that.

“This has been so good,” Samantha Azzarello, global market strategist for JPMorgan ETFs, said in an interview at Bloomberg’s New York headquarters. But “the risks are to the downside and it makes sense to take some profit, rebalance and hold more cash.”

A focus on economic data doesn’t do much to instill confidence, despite the strong jobs report. Much of it has been weakening. Virtually everyone is still pinning their hopes on a so-called insurance cut from the Fed that may boost growth while the trade mess is unscrambled.

But even that may be too little, too late, according to Morgan Stanley (NYSE:MS). A gauge of U.S. factory activity is at its lowest level since October 2016, for instance, and many other data points are already headed lower. “An accommodative Fed might cushion the blow but likely won’t prevent it,” wrote the firm’s strategists, led by Mike Wilson, in a note. Wilson and his cohort recently predicted the S&P is likely to fall into a 10% correction in the third quarter on the back of the weak data.

“When the Fed starts cutting rates here, it’s, number one, an acknowledgement that they already went too far to begin with, which is good. And number two, a sign that the economy is starting to weaken and they’re trying to offset the impact of a weaker economy,” said David Spika, president of GuideStone Capital Management. “And neither one of those are positive for stocks.”

UBS’s Francois Trahan warns that ignoring the weakening data comes with peril. Investors were fooled by the “bad news is good news” mantra in the past two slowdowns and markets ignored the negative developments for a time, he wrote in a note. “While the S&P 500 has reacted well to bad economic news of late, this is simply not sustainable,” he said. “The upside for equities finally came to an end when earnings expectations began to decline.”

Earnings forecasts for S&P companies have been getting worse by the week. More than 80% of those that have issued new forecasts have slashed their profit estimates. At Citigroup, a client survey showed a majority believes profit forecasts for next year are too high. “Seasonally, this has not been a great time for share prices and 2019 may not be any exception,” wrote strategists led by Tobias Levkovich in a note.

“We would expect higher volatility,” said Spika. “Everything was up in the first half -- every asset class. Safe havens, risky assets, everything went up,” he said. “It’s just not sustainable.”

Why It May Be Downhill From Here for Stocks in 2019
 

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Comments (12)
Jul 08, 2019 4:28AM ET
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Markets up
Jul 08, 2019 4:27AM ET
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Not sure
Bagger Vance
Bagger Vance Jul 07, 2019 12:06PM ET
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All these posts are lowIQ
Markets Trader
Markets Trader Jul 07, 2019 10:40AM ET
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when markets go up than Trump is 100% right, when markets go down investors/traders are 100% the ones to feel the losses. fact of life
Opas Inphum
Opas Inphum Jul 07, 2019 10:29AM ET
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Trump and trade deal is just a game plan. He's not dumb not to realised that the economy will fall apart these years of his presidency. He's the best candidate for this greatest crash ever, and take all the blame for himself. Why?. money of course. All the short position they're all accumulated all these years will make him super rich in a few months. All he has to do is tell everyone that everything is still great and then he just keep selling/shorting it.
Mario Gragnani
Mario Gragnani Jul 07, 2019 10:29AM ET
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Exactly
Bagger Vance
Bagger Vance Jul 07, 2019 10:29AM ET
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Ignorance is bliss for you
David David
David9 Jul 07, 2019 10:14AM ET
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If trump don't get a deal done, we will head into a depression.
John Smith
John Smith Jul 07, 2019 10:14AM ET
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What deal are you refering to. There are many.
Bagger Vance
Bagger Vance Jul 07, 2019 10:14AM ET
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Not true
balbir singh
balbir singh Jul 07, 2019 10:09AM ET
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The way  US indices closed on, 3rd july, had given enough indications that it is falling on 5th july.
Mario Gragnani
Mario Gragnani Jul 07, 2019 10:09AM ET
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You mean 8th.  Anyway I agree. If you join euro and us market so the period btw 9.30 and 22.15 cet you will see that opens at 9998,74 it goes down to 2971,38 and closes at 9991,38. Given that we re in an uptrend this could mean hanging man on the daily. We are just a day after ath. . So if monday will be like friday we ll have two days in a row with a hanging man exactly what  you find on 4 and 5 oct 2018. What happened next? Anyway everything is possible.
Mart Bab
Rubberduck1973 Jul 07, 2019 9:56AM ET
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How can you all be so ignorant. Politicians don’t make an economy grow. Hard working americans do. Politicians only brag. Trump in particular brags the whole day.
Mart Bab
Rubberduck1973 Jul 07, 2019 9:56AM ET
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And to make things wurse, Trump is the Guy who is going to reck the economy. If you are not able to see this, you are ignorant to extreems
Erski Gumby
SB20 Jul 07, 2019 9:56AM ET
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I’m pretty sure you meant wreck and not reck because those words have very different definitions.
Brady Murray
Brady Murray Jul 07, 2019 9:39AM ET
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They arent looking at the booming economy under Trump. He has put in place the foundation of a great economy. Will it slow, of course. Thats how it works. A little consolidation here for a few months wont hurt.
PMSF Small
PMSF Small Jul 07, 2019 9:13AM ET
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They cant and wont say anything good about our President who has the runs on the board
 
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