What to Expect from the Markets in 2019

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The stock market has been showing signs of trouble for several months now, with earlier gains erased by a series of corrections and then boosted again following a series of significant up days. Year-to-date, the S&P 500 is up around 2.7% while the NASDAQ has gained around 7.3%. However, both are off earlier highs which peaked around September.

As we head into the final month of 2018, all eyes have turned towards next year and what investors might expect to see. Inflation has been steadily rising, and with volatility returning to the markets, large swings up and down should be the norm for investors. With uncertainty spiking, investors need to have an idea of what next year might bring so that they aren’t caught unawares.

Looking ahead to next year

One of the big concerns for 2019 is where interest rates are headed. The Fed appears ready to raise rates at least three more times, with interest rates following suit. In 2018, the yield on the 10-year treasury jumped nearly 33% from 2.4% to an inter-annual high of 3.20% in September, but has since fallen slightly to about 3%. Next year should see yields climb again with a ceiling that has yet to be determined.

As interest rates continue to rise, financial stocks should see a boost as companies take advantage of greater ROI in their accounts. Long-term loan rates will climb faster than short-term rates, giving banking stocks a wider margin and translating to bigger earnings surprises for 2019.

Defensive and non-cyclical industries like utilities, consumer staples, and pharmaceuticals should also outperform the broader indexes if the economy enters a contraction phase. Certain items like health products and utilities have constant demand regardless of the state of the economy. While these stocks may not see the bullish explosiveness of their cyclical counter-parts, they provide investors with a safe haven during volatile markets.

Corporate earnings will be the tell-tale sign along with total 2018 GDP results as to whether investors can expect a bear market next year. For the most recent quarter, investors have seen disappointing numbers coming from the technology industry led by Facebook, Apple and other large names, sending a signal to investors that there may be trouble ahead.

Final considerations

The end of the second longest bull market in US history is looking more and more likely to come to an end sooner rather than later. 2019 could be the year of the bear, so investors should establish defensive positions and de-leverage their riskier holdings. While there’s no way to know exactly when the bull market will end, there are enough signs that investors should at least hedge against a downturn.