Predictions 2019: Mid-Year Update

I am on vacation at Amelia Island, Florida. Fourteen family members packed in a beach house for a week. Fantastic. 

Usually around this time of year I check in with my stock market predictions for the year. The predictions are in italics.

1. The S&P 500 high is 2,900. I am less bullish on stocks than I have been in 10 years. 2018 was a barnburner for S&P 500 earnings, up like 25%. That is a tough act to follow. Earnings aren’t very likely to grow more than 5% in 2019. And it seems to me there are more threats to earnings than there are catalysts for earnings to outperform. I mean, we still have no resolution for tariffs. And China’s economy itself is giving off all kinds of warning signs. Simply put, the U.S. economy will take a hit if China goes into recession.

Last year at this time, the forward P/E for the S&P 500 was 18. Today it’s about 16. Investors have already priced in lower expectations… but are they low enough? We will get fourth quarter earnings numbers in early February. They will be good, but guidance likely won’t be. The reaction likely dictates the next six months of trading.

So far, so good: The high on the S&P 500 so far this year is 3,027. If that stands, I will take the win on this prediction. Why? Because the index started 2019 at ~2,500. My forecast was quite bullish: suggesting 16% upside. You call for 16% and get 20%? Well, that’s a win in anybody’s book. 

2. U.S. GDP does not beat 2.5% (and probably comes in closer to 2%). I hate to stick with the negative theme, but I expect U.S. GDP growth to revert back to those ~2% levels. Terrible? No. But not strong, either. And that comes with a host of implications for consumer confidence, employment growth, and stock prices. The year-over-year comparisons won’t look good.

Jury’s out (but looking good): First quarter GDP hit 3.1%. Q2 fell to 2.1. So we’re averaging 2.6% so far. But the president just added a bunch of new tariffs to really kick the trade war into high gear. Can’t say yet exactly what the effect will be, but it’s likely to be good. Buckle up, folks — it’s looking a little bumpy.

3. Just one interest rate hike in 2019. It’s simple: I think a bunch of weakening economic data keeps the Fed on the sidelines next year. 

You decide: Coming into the year, most people thought two to three hikes were coming at least. We didn’t even get one. In fact, we just got a rate cut. And the reason, as I said, is “a bunch of weakening economic data [keeping] the Fed on the sidelines [this] year.” Maybe I missed the specifics, but I was spot-on about the weakening economic data. The issue is the same as it has been for years: The world has way too much production capacity for the level of demand (thanks, China). EU growth looks terrible, China is hurting from trade, risks are to the downside for sure. 

4. Gold still can’t break $1,350. Weak growth, yes. But gold still can’t get moving. After all, like any asset, gold is a liquidity trade. There has to be money available to buy it. That’s why gold didn’t really rally until after the financial crisis (when the Fed was really pumping). Investors raise cash when the stock market is weak. That means selling gold, too.

WRONG: Gold stocks look pretty damn solid. The SPDR Gold ETF (GLD) is at five-year highs around $140 and looks poised for a run at $170.

5. Oil cannot beat $80 a barrel. The Saudis have opened the spigots, but that likely won’t last. They will want higher prices as the Aramco IPO gets closer. Problem is, demand from China is likely to be weak. U.S. shale will not be slowing down. It’s pretty easy to imagine oil falling back into the $40s, especially early in the year.

Correct: I’ve heard from some traders who are getting bullish on oil. I don’t get it. Markets remain oversupplied, and the growth the world has right now is not enough to really push demand. Electric cars are really the big threat, as they sop up incremental demand growth in China.

6. Tech is the leading sector, but it’s not awesome. These days, tech is basically Apple, Google, and Microsoft (Amazon is consumer discretionary). Apple is hitting a slow spot for handset sales, yes. But the company is so much more than handsets these days. The big investors know this, and they will continue to let the dividends and share buybacks work for them.

The forward P/E for Apple is already down to 12. Don’t look for it to go a whole lot lower (unless tensions with China really heat up; then all bets are off). I don’t expect a lot of upside for chips, but not a lot of downside, either. Pay attention to mobile equipment stocks like Nokia. 5G gets moving in 2019. Disney could be a great performer, too, as it launches its own network. There’s also a decent case for utilities in 2019. 

Correct: Tech has led, all right, but if you’re overweight Google and Facebook, the rising chorus for regulation can’t make you happy. Sure sounds like some action is coming from Congress. Changing how a company does business is always a challenge. BUT imagine if Instagram and WhatsApp were spun out of Facebook. Or if you could buy shares just in Amazon Web Services. There is potentially a lot of value to be unlocked.

7. Bitcoin. I like the idea of cryptocurrency. I really do. But I do not see why one crypto should be worth $10,000 and another should be worth $100. We already have a way of valuing things. It’s called the U.S. dollar. Works pretty well, too. I think 2019 is the year Bitcoin gets so cheap you almost have to buy a little. And I mean like, spending $100 or $200 just so you can have a little. (Remember, you don’t buy whole Bitcoin. You buy increments.) So where’s that point? $1,000? $500? Where’s the point where you would think, “Ya know…”? I think it’s probably under $1,000…

CORRECT: Well, I missed “that point,” but Bitcoin sure launched this year. From ~$3,600 to over $11K. That’s a win, baby.

8. Cannabis stocks. So, I’ve got cannabis and Bitcoin right here next to each other. That’s a coincidence. The two are nothing alike. Cannabis is a legitimate consumer product that likely has some pharmaceutical applications, too. Companies can sell it, and do so profitably. So it can be valued.

I don’t think we actually get to legal cannabis at the federal level in 2019. But I do think the path to fully legal cannabis becomes crystal clear in 2019. We can expect to learn a lot more about established companies’ plans. We will hear about partnerships. Canada is reportedly still working out supply issues. The U.S. market is at least 10 times bigger. And if the stock market continues to correct, you know what to do: Add the best weed stocks on the cheap. But please, pay attention to valuation, and make sure there is a solid plan for profitability.

One more thing. Weed stocks have been selling off with the rest of the market. Except for one stock. That’s The Wealth Advisory’s A-rated pot stock, which hit a new all-time high yesterday, while the Dow was down over 500 points. You know what it means when a stock shows amazing relative strength like that, right? Yeah, I thought so.

CORRECT: Total gains for The Wealth Advisory‘s #1 weed stock got to 520% this year. I’d call that a win for sure. We’ve got another idea for you that could do just as well. You can check it out here.

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.