The following is an excerpt from Zacks Chief Strategist John Blank’s full Jan Market Strategy report To access the full PDF, click here.
Yes. I wrote “A Bullish 2019 Is Here.” I am bullish on stocks in 2019. And I am not a perma-bull.
Here is what I wrote one year ago. Verbatim:
“Imposing a rank ordering on stock market risks is a great, great exercise. It forces you to show what priority of focus you should have. I did that for my 10 biggest risks in 2018.
“The #1 risk is the one that will happen most quickly in time -- likely near the start of the year. That would be an implosion of NAFTA, leading to an unraveling of trade within North America.
“I see #2 -- overvalued equities -- as the dominant concern, with financial market interaction coming from the #3 High Yield bond markets, and a potential #4 Bitcoin collapse.
“All of these risks could be inter-related. I think this, simply because financial markets themselves are interwoven so tightly.”
If you are looking back, over the last 3 or 4 months, you won’t agree with me.
Look ahead, like the stock market does, 6 to 12 months.
Fair Value on the S&P 500 in 2019
I think 2,900 on the S&P 500 for Q3 or Q4 2019 is a fair but bullish target. That will sound rich to many, given the fierce headwinds we read about.
Worry about a growth slowdown gaining traction is the predicament we find ourselves in. The latest PMIs out of China broke that 50 Rubicon. PMI data may bounce back independently, or the Chinese authorities may stimulate.
On January 2nd, China announced plans to build 3,200 km of new high-speed railways in 2019, with the total length expected to exceed 30,000 km.
On January 4th, China cut its reserve ratio 1.0%. These hit Jan. 15th and Jan. 25th.
The U.S. economy is doing fine.
This huge share price struggle is more about the clouds of policy uncertainty hanging over 2019 than it is about the present state of macro data -- or earnings, for that matter.
I looked into the sectors of the S&P 500 this month. I found Industrials have gotten their earnings growth mojo back on. That is good news. The Obamacare enrollment expansion was a key earnings support across 2018.
We need to get all cyclical sectors on the move in 2019.
What’s Going On with All of the Shorting and Selling?
The last 3 months have been witness to a classic valuation takedown.
In January, the S&P 500 prices at 14.2X forward 12-month earnings. That’s far below a 5-year average at 16.4. This is also below a 10-year average at 14.6. This means the value stock bargain hunters are back in play.
The make or break catalyst for bears and bulls is a China trade deal and/or stimulus. Those are not mutually exclusive, at this point. Fed Chair Powell should slow walk more rate hikes, at this point too.
The chap in the White House is boxed in -- and using all available policy tools to fight back -- so the FOMC must change gears.
Finally, a divided government is in place, supplying more clouds.
All of that implies share price technicals are not favorable for a few more months. Read the tweet below, for a summary on that.
“Oppenheimer charted all bear cycles since 1932 and argues the stock market still needs ‘additional price consolidation’ — either a double-bottom or a ‘V’ reversal off a failed breakdown.”
– Carl Quintanilla
Given the expansion is intact in the USA, though, I remain bullish overall on stocks. But the next month or two look poor, based on the technicals and the ongoing US/China trade negotiation.
Earnings and Returns. Look Ahead, Not Behind You
2018 returns were a lousy -6.2%.
What happened to annual S&P 500 returns in 2019 may look more like bullish runs in year’s past. The annual 2017 S&P 500 returns came in at +22.6%. In 2016, this U.S. benchmark rose +12%. In 2015, it rose a paltry +1.4%. In 2014, it rose +14%. In 2013, the index saw the best of years this cycle, at +32%.
For Q4 2018, the estimated earnings growth rate for the S&P 500 remains solid at +12.4%. If 12.4% is the actual growth rate for the quarter, it will mark the 5th straight quarter of double-digit earnings growth for the index.
Looking at future quarters, analysts see just single-digit earnings growth for 1H-2019. That is one of the problems bulls face.
Yet, it feels worse than it is.
Zacks January 2019 Sector/Industry/Company Telescope
Four sectors improved from December to January: Industrials, Consumer Staples, Utilities and Consumer Discretionary. What do I make of that?
The retail sales were the best for a holiday season since 2005. And the winter is putting some heft into bills in the colder regions of the country.
I don’t see a big GDP growth lift here. I do see a seasonal effect.
(1) Health Care sinks back to Attractive from Very Attractive. Drugs sunk a bit.
Zacks #1 (STRONG BUY) Stock -- Myriad Genetics (MYGN - Free Report)
Myriad Genetics, Inc. is focused on revolutionizing patient care through the discovery, development and marketing of transformative molecular diagnostic tests that address pressing clinical needs across multiple medical specialties.
Myriad is the pioneer and leader in molecular diagnostics, offering innovative products that transform patients' lives.
These products include leading molecular diagnostic tests for hereditary cancer, urological cancer, lung cancer, autoimmune disorders and other diseases.
(2) Financials stay at Attractive. Investment Funds now leads, as does Finance. Insurance stays strong again.
Zacks #1 (STRONG BUY) Stock -- CME Group (CME - Free Report)
As the world's leading and most diverse derivatives marketplace, CME Group is where the world comes to manage risk.
CME Group exchanges offer the widest range of global benchmark products across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural products and metals.
(3) Industrials rise to Attractive from Unattractive. Business Products and Aerospace & Defense are the new leaders. Pollution Control and Airlines also look strong.
Zacks #2 (BUY) Stock – Rockwell Automation (ROK - Free Report)
Rockwell Automation is a leading global provider of industrial automation power, control and information solutions that help customers meet their manufacturing productivity objectives.
The company brings together leading brands in industrial automation for Complete Automation solutions, including Allen-Bradley controls and services, Dodge mechanical power transmission products, Reliance Electric motors and drives, and Rockwell Software factory management software.
(4) Consumer Staples jumps to Attractive from Very Unattractive. Agri-business stays the leader. Food-Drug Retail and Soaps & Cosmetics provide a new lift.
(5) Utilities rise to Attractive from Market Weight. The Utilities-Gas Distributors are the best spot to find strong stocks, with the winter fully in gear.
(6) Consumer Discretionary rises to Market Weight from Very Unattractive. Home Furnishing-Appliance is the new leader, after being a big lose, followed by Publishing (another big turnaround) and Apparel.
(7) Info Tech stays at a Market Weight. Telco Equipment is still the strong niche to mine.
(8) Communication Services rises from Very Unattractive to Market Weight. The Telco Equipment providers are looking strong.
(9) Energy falls to Unattractive from Market Weight. Coal and Energy-Alternates stayed strong. But the E&P companies and the Oil & Gas Integrated sector took a fall.
(10) Materials stay at Unattractive. There are no obvious positive stories here.