Forget the investment losses of 2018, stocks will rebound

What to expect in 2019? December’s stock market downdraft and traumatic 2018 returns reduced 2019 expectations. Instead, expect global stocks to rise 15 to 25 per cent or more this year, as a V-shaped rebound aligns with multiple positive factors. Don’t let the past blind you; 2019 will be great. Maybe that sounds crazy to you. UK stocks finished 2018 down a bumpy -8.8 per cent, enduring two corrections — sharp, sentiment-driven plunges of -10 to -20 per cent, according to MSCI UK index data. Global stocks fared barely any better, falling -3 per cent in 2018 and plunging -15.9 per cent between August’s high and December 24. It was the second-worst December on record, grinching Christmas. All that left a terrible taste in everyone’s mouth, sparking widespread pessimism. People are fretting about the US Federal Reserve, potential European economic weakness, quantitative easing ending at the European Central Bank, Italian debt, a Chinese hard landing and global trade tensions. Brexit dread is worldwide. Investors re-chewed the same cud repeatedly. I expected far better. Mea culpa! But a negative year makes forecasting both much easier and more certain. Being bearish now contradicts a century of stock market history. Using the US’s S&P 500 since 1925, stocks averaged 12.4 per cent in the years following all down years. Two successive negative years have happened, but only during global recession or world war. Neither is likely now. I think Christmas Eve was the correction’s bottom. Even if there is a new panicky plunge ahead to new lows that some may call a bear market, it doesn’t much matter. Corrections and bears both end after super-sharp drops — the left side of a V-pattern—like December, where the last 10 per cent decline happens in a very short duration. The V’s right side follows fast. The S&P 500 has averaged 34 per cent in the 12 months after corrections bottomed out and 47 per cent after bear markets ended. If Christmas Eve remains the low, this correction ended later in the calendar year than any on record. Hence, simply getting an average post-correction rebound now implies outstanding 2019 full-year returns. Recommended Ken Fisher As the Brexit fog clears, UK stocks will bounce back Many believe bad times will remain, but 2018 was sentiment-driven. Few notice the positive economic and political backdrop. Even continuous Brexit hand-wringing hasn’t stopped UK GDP from expanding. It grew 0.3 per cent in the three months to November thanks to Britain’s robust services sector. Purchasing managers’ indices showed continued December growth, with forward-looking new orders expanding. That’s with Brexit uncertainty weighing on risk-taking. Whenever politicians finally get on with Brexit, that fog will lift, unleashing pent-up British and Continental demand. Global growth also continues. People fret over high-profile weak spots. Yet only five developed nations contracted in the third quarter — Germany, Italy, Sweden, Switzerland and Japan. Together, they’re just 14.5 per cent of global GDP. The growth of the other 85 per cent more than offsets that portion. Plus, their issues are temporary, for example Europe’s auto industry backlog from new emissions standards and Japan’s natural disasters. Meanwhile, global lending and money supply keep rising, fuelling investment. Despite a universal belief otherwise and the tariff tantrum, world trade keeps growing, at a rate of about 4 per cent. Better still, The Conference Board’s Leading Economic Index series is high and rising globally. It’s the single best forward economic predictor you will find and is rising for almost every major country except Britain. Gridlock keeps political risk low. In the US, 2019 is the third year of Donald Trump’s presidency — historically, the best in America’s four-year political cycle, as lawmakers turn their attention to 2020’s big election. Year-three US returns are positive during 91.3 per cent of the S&P 500’s history, averaging 17.8 per cent with no negatives since a mere -0.9 per cent in 1939. All of Europe is gridlocked. That’s bullish. Investor sentiment typically lags behind the market, so 2018 isn’t 2019. Don’t let yourself lag behind that sentiment December’s market action suggests the right side of the V is here. Though little noticed, US hedge funds liquidated en masse. Having performed poorly for a decade, in early December more than 500 hedgies privately announced to their investors they were closing by year end. As they collided against each other toward that fixed-date liquidation door it forced rapid selling, prioritising speed over price, cascading prices downward. Others were likely to have raised cash ahead of a redemption wave in early January. The stampede freaked other investors. Exchange traded funds and mutual fund flows show regular investors panicked, adding to doomsday sentiment. Mutual fund outflows spiked to levels last seen in March 2009, when the last bear bottomed. But market fright eventually passes. World stocks have risen more than 10 per cent since Christmas Eve’s low. Investor sentiment typically lags behind the market, so 2018 isn’t 2019. Don’t let yourself lag behind that sentiment. You want to be invested before stocks finish rocketing up the V’s right side. That’s now.

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