As the year draws to a close, a lot of people I speak with want to know what lies in store for the stock market in 2019. Many investors are sitting on strong gains. Many are also uncomfortable with the high levels of volatility that we’ve seen in the stock market over the past three months—you know, with swings of 400 to 600 points up and down on some days. So, one of the questions I get pretty often nowadays is whether they should close out their positions and ride it out until the dust settles.
While it’s good to plan ahead in life, it’s not so easy with the market. Knowing what lies in store, closing out your positions, then getting back in (what’s also called “timing the market”) is extremely difficult over the long run, even for the best of us.
Nobody can perfectly predict the future So, much as I would love to definitively tell you where the market will be in 2019 and beyond, I have to be honest. I can attempt to make an educated guess, but there’s a pretty high probability that I’d get it wrong.
That’s because market movements are driven by future events—with the magnitude of up or down moves dependent on the weight of the news of the day and its short and long-term impacts. And, as all of you know, nobody can perfectly predict future events.
For instance, I could make a guess about what the Federal Reserve might do with interest rates in 2019, but the Fed’s policy actions are driven by future domestic and global economic data. So even Jerome Powell, the Chairman of the Federal Reserve, cannot tell you where rates will be by the end of 2019.
Failed Predictions Of The 2016 Election And The Market’s Reaction
The 2016 election offers a good example of how it’s impossible to predict the future and how even the best of us are often wildly off the mark. Almost 90% of all election polls predicted that Hillary Clinton would win the presidency in 2016. The probability of a Trump win was pretty small.
Further, market gurus said a Trump win would bring a lot of uncertainty into the world because of his sabre rattling against China, the Paris Agreement on climate change, Obamacare, and a host of other issues.
Predicting The Impact Of An Event Is No Easy Task
A well-respected MIT professor, Simon Johnson, predicted that if Trump were elected, it would “likely cause the stock market to crash and plunge the world into recession.” Trump’s stance on NAFTA and building a border wall with Mexico led Goldman Sachs to predict a 25% crash in the Mexican peso.
Instead, the Dow is up about 25% since Trump’s win in November 2016. And after losing value in the first two months after the election, the Mexican Peso rallied to new highs and is now back to about where it was before the U.S. election, at about 20 pesos to the dollar. So Goldman’s prediction of a 25% crash in the peso was also quite off the mark.
Taking Action Quickly Enough—Not Easy
Now, let’s say I could somehow predict what was going to happen AND how it would impact the stock market in 2019. You would still need to figure out which stocks might be impacted and how, and you’d need to time your buy or sell decisions perfectly so others would not drive the price before you.
As you know, with stocks and investments, an information advantage or arbitrage opportunity is useful only if you act on it before everyone else does.
Timing Your Trades Is Extremely Difficult
Let’s say you do get out of the market before everyone else, and the market subsequently tanks. Cash, as we all know, earns practically nothing and loses value to inflation. So you may be looking for someplace to invest so your money beats inflation. Now…how and when do you get back in? Because calling a bottom on the stock market is a fool’s errand. Many have called a bottom, only to see stocks sink even further.
Just as stocks and other investments can be irrational on the upside, defy expectations, and rise ever higher, they can do the same on the downside, and trade down to valuations no one expects. So timing your market entry and exit points is extremely difficult. If you do, perchance, correctly call a top or a bottom, don’t gloat. Instead, chalk it up to “lady luck”, pure and simple.
You Cannot Anticipate Unpredictable Consequences
Think back to November 2017, when Trump nominated Jerome Powell to lead the Federal Reserve. Now, a year later, Trump’s busy publicly taking down his own appointee because he’s not happy about impending interest rate hikes by the Fed. So Trump himself has often fallen victim to the unintended consequences of his own decisions.
Future events often have unpredictable consequences, especially in the stock market. For instance, Trump’s tax cuts cut the corporate tax rate from 35 percent to 21 percent beginning in 2018. He also cut taxes for individuals.
While the corporate tax cut has been great for businesses and their stocks, the tax plan increases our federal deficit by $1 trillion over the next 10 years, according to the Joint Committee on Taxation. It will also increase our national debt, which currently stands at $21.9 trillion or about $180,000 per taxpayer!
Something that’s supposedly good for stocks could surely have negative consequences down the road, such as perhaps raising interest rates by a lot or taking us into a recession.
Check Your Asset Allocation
So what can you consider doing to ride out the market’s rough seas this December? Four words: check your asset allocation. Here’s a list of things to think about.
Start with your big winners. See if their valuations are too high or still reasonable. If you think you’d buy more at current levels, let them ride. If you’d balk at paying current prices, speak to your financial advisor about how you can help protect your downside through hedging strategies, or selling and closing some positions. Keep in mind that you will owe taxes on capital gains, so factor that into your decision math.
Next, try and get a sense of defensive stocks which might do okay even if the broader market tanks.
Also look at stocks that might offer you some degree of recession protection. Consider adding some of these to your portfolio.
With the stock portion of your portfolio, make sure you’re adequately diversified so a market collapse doesn’t wipe out all your positions.
Now may also be a good time to shield some of your assets from the volatility of the stock market. So if you haven’t already, consider looking at bonds and perhaps even other asset classes. With bonds, be aware that interest rates may rise over the coming years, which may then have a negative impact on long-term fixed investments. Instead, consider exploring strategies such as laddering, which I spoke of recently, and do not rush blindly into the comfort on CDs.
The year-end is always a good time to look at how your investments have done, so use this opportunity to review your portfolio for 2019.
Disclaimer: Past performance is no guarantee of future results and there can be no assurance that the hypothetical results presented can be achieved. Equity investing involves market risk, including possible loss of principal. CDs are FDIC insured and offer a fixed rate of return, whereas both principal and yield of investment securities have risk and may fluctuate with changes in market conditions. Investments seeking to achieve higher rates of return generally involve a higher degree of risk of principal. Consideration should be given to the possible loss of a part or all of principal invested. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing piece to make decisions. The information contained herein is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial advisor with questions about your specific needs and circumstances. There are no investment strategies, including diversification, that guarantee a profit or protect against loss. Past performance doesn’t guarantee future results. Equity investing involves market risk, including possible loss of principal. All data quoted in this piece is for informational purposes only, and author does not warrant the accuracy, completeness, timeliness, or any other characteristic of the data. All data are driven from publicly available information and has not been independently verified by the author.