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Predictions 2019: Part II

Written by Briton Ryle
Posted November 21, 2018

I've been playing fantasy football for about 30 years. I won my league the year Terrell Davis ran for over 2,000 yards. I had Emmitt Smith when he broke the single-season touchdown record. I have drafted Flipper Anderson, Thurman Thomas, and yes, even the Nigerian Nightmare himself: Christian Okoye. 

After 30 years, that 10-team league is still active, with four original members. And what you are thinking is true: We all have nothing better to do. 

Drafting a fantasy football team is not completely unlike building a portfolio. You can't have it all, so you have to pick your spots, knowing where risk is appropriate and where it isn't. You will make mistakes. And you will have bad luck. But done correctly, the good will outweigh the bad.  

You want a track record. Companies and players that have done it before have a better chance of doing it again. 

Like certain IPOs, there will always be a rookie or two that hit the ground running. I don't even have to look it up, and I can tell you that Fred Taylor scored 17 touchdowns for the Jaguars in his rookie season. 

If you think of NFL football teams like sectors of the economy, then the Kansas City Chiefs and LA Rams are your cloud companies, your FAANGs. Solid players on those teams will have more opportunity than superstars on bad teams. I'm looking at you, Odell Beckham...

Quarterbacks like Matt Ryan or Philip Rivers are like great dividend stocks. Steady, dependable. They don't tend to blow it out and lead the league in any categories. But they also never have terrible seasons, either. 

Making predictions is similar. Because like with companies, economic trends tend to have momentum. Oil demand rises because global growth is expanding. An expanding economy tends to attract more investment, which pushes oil demand higher. And you get a self-reinforcing trend. 

There's a thing in fantasy football about running backs. No matter how good a guy has been, you don't draft a running back over the age of 30. Or one who has had three straight years of at least 400 touches (runs and receptions combined).

Sure, there are exceptions to this rule. Adrian Peterson is having a damn good year at 33. And Frank Gore is viable at age 35. Freaking mutant, that guy. 

Economic trends run until they don't. And when they turn, it can be a sharp drop-off. Look at oil from 2008 to 2014. There was that crazy spike in 2008. But then the trend was pretty steady until 2014, when oil dropped from $110 to $40. 

It works negatively, like with gold, too. Gold has been dead in the water since 2012 or so. That downtrend will change at some point. But you can't just pick a spot. You gotta wait for a sign. 

The secret to picking stocks and making predictions is very much about trend recognition and analysis. Find the emerging trends, find the trends that have momentum... but also find the trends that are running out of steam and pay close attention.

It's a funny thing, but when trends are widely accepted, that's the time to start paying attention for a reversal.  Like, both Tom Brady and Aaron Rogers have been two of the best quarterbacks you could have for the last five years at least. This year, those trends have changed. 

Likewise, I've been relentlessly bullish on earnings and GDP growth for 10 years. Seriously, people thought I was nuts to be so bullish in 2010 and 2011. I got hate mail for pounding the table on Bank of America at $9.70 as share. “A bank? Are you kidding? They are all going bankrupt!”

But there's been a very simple case for those earnings and GDP trends to continue. Low rates, rising employment, the potential for rising wages, etc.

But now? Ten years into an economic expansion? And after a year that saw a surge in earnings due to a tax law change? Mmmm, that's a trend that's looking a bit less certain than it has in years past...

On the flipside, you need a catalyst to get a recession. Some shock to the system that makes consumers stop spending. Predicting systemic shocks is difficult by definition. If you see it coming, it's not really a shock.

Anyway, let's get to what I see coming for 2019...

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.

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.

We've already seen some companies (Starbucks, Cisco, GM) lay off workers. All you need is two consecutive quarters of negative growth to officially be in a recession. Odds of that are probably 50/50 at this point. Government deficit spending has exploded this year, accounting for a large part of GDP growth. Look for that to change now that the Democrats control the House (yeah, I said it: the Dems reel in spending). 

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. 

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.

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.

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. 

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...

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. You can learn about this hidden gem right here.

Until next time,

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Briton Ryle

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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 also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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