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Stock Market Outlook: Steadily Grinding Higher

The stock market is up more than 10% year-to-date, and while some key events could deliver volatility in March, professional investors see reason to remain optimistic.
Feb. 28, 2019
Investing, Investing Data, Investing Strategy, Investments
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If you recall the fable of the tortoise and the hare, the U.S. stock market looks a bit tortoise-like lately. Without a bunch of dramatic jumps higher, the S&P 500 is slowly but surely pulling itself out of the late-2018 slump that had many investors worried the market’s rally was over.

Take a look at any six-month chart for the index, and you’ll see a distinct V-shape. After its all-time high in September, the S&P 500 tumbled 19.8% in less than 70 trading days, just shy of entering a bear market by late December (defined as a decline of at least 20% from a high, based on closing prices). Now the S&P 500 is just 5% below that September high. Meanwhile, the Nasdaq Composite Index has recovered from the bear market it succumbed to in December.

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What gives? The Federal Reserve, which was blamed in part for the market sell-off, is now getting some credit for its rally. Policymakers made an apparent U-turn in their outlook for interest rate increases this year, signaling at their January meeting they’ll be “patient” when considering further hikes.

Along with another Fed meeting, here’s what investors will monitor in March.

The big three: China, Brexit and the Fed

The calendar for March has some key events, including a possible late-March summit between U.S. and Chinese leaders to discuss trade; the United Kingdom’s March 29 deadline for withdrawing from the European Union (so-called Brexit); and the second Fed meeting of the year.

Barring any surprises, these events aren’t likely to rattle the market, according to investors. Here’s why:

  • China. While trade talks were used as a scapegoat during the market’s sell-off, there was no new news then — and there still isn’t, says Frank Cappelleri, chief market technician at Instinet: “Nothing is squashed yet, but nothing is solidified at the same time.”
  • Brexit. There could be another vote in the British parliament before that key March 29 departure date, but it’s hard to predict what impact — if any — that might have on markets, says Leslie Thompson, managing principal at Spectrum Management Group. “The U.S. market has largely ignored it this year,” she says.
  • The Fed. Investors don’t expect the Fed will raise rates at the meeting scheduled for March 19-20; rather, Thompson believes policymakers will “listen to and look at information as it comes to them” before further hikes.

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Use a pullback as a buying opportunity.

Leslie Thompson, managing principal at Spectrum Management Group

Looking ahead, Thompson is optimistic. March (and April) historically have delivered gains for the S&P 500, while the third year of a presidential cycle tends to be “overwhelmingly positive” for stocks, she says, citing data she’s analyzed.

What to do now: The market outlook for U.S. stocks remains attractive in Thompson’s estimation, and she likes small- and mid-cap stocks — along with technology, health care and consumer discretionary sectors. While the market might see “a pause” in the rally ahead, that would be beneficial, because some stocks have come up in value quite a bit from their December lows, she says: “Use a pullback as a buying opportunity.”

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The devil is in the details

Even for people who watch the market’s every move, this year’s rally has been surprising. And yet, there’s also no good reason to doubt it’ll end anytime soon.

We have a situation where people are forced to stay involved and hesitant to sell.

Frank Cappelleri, chief market technician at Instinet

Why? Because the market’s been steadily grinding higher, generally with small daily moves (of less than 1%), and history suggests that dynamic can last a long time — even as some people remain skeptical, Cappelleri says. “We have a situation where people are forced to stay involved and hesitant to sell.”

For Cappelleri, some of the most granular details offer reason to remain bullish:

  • On days when the S&P 500 has been up, it’s closed above its daily midpoint 75% of the time — a dynamic so persistent that it will be telling once it changes, he says.
  • Going back to 1928, there have been only six other times when the S&P 500 was up more than 10% in January-February, as it was this year, and in five of those six years the gauge was higher again in March, according to data he compiled.

But there are some inconsistencies:

  • Analysts project a decline in corporate earnings for the first quarter, and many people worry this could continue into the second quarter — what’s known as an “earnings recession.” But investors have largely brushed off this concern for now, Cappelleri says.
  • Gold — often perceived to be a safe haven asset — is rallying along with stocks. The price of gold started going up last August and has continued since the market’s December crash. “Can gold and the S&P rally at the same time?” Cappelleri says, “Yes, but we haven’t seen that persist in a long time.”

What to do now: Until there’s a shift in sentiment, the market’s likely to continue its slow upward climb — and that’s beneficial if you’re bullish about stocks for the long term, Cappelleri says: “People expect the market to pull back, but until you see momentum really turn, you can’t expect it to happen.”

» Where to invest now: Investment strategies for the first quarter

Stock market forecast

Even as the S&P 500 has jumped almost 13% from its December low, there’s hardly raging bull sentiment on or off Wall Street. That said, sentiment has improved to fuel the market’s recent rally.

As for stock market predictions, here’s the latest on what various investors are forecasting:

  • Based on their target prices for stocks in the S&P 500, Wall Street analysts project the index could surpass 3,060 in the next 12 months, according to data compiled by FactSet. That’s an increase of almost 10% from February’s closing level.
  • Retail investors are more optimistic again, as almost 42% expect stock prices to be higher in the next six months, according to a weekly sentiment survey conducted by the American Association of Individual Investors. Such bullish sentiment is back to levels last seen in mid-November.
  • CNNMoney compiles a “Fear and Greed Index” based on seven indicators of investor sentiment. As of month-end, the index was at a “greed” reading of 72 on a scale of 0 to 100, up from the “extreme fear” of late 2018, but far below 2017’s “extreme greed.”

For buy-and-hold investors, the S&P 500 has delivered historical average returns of about 10%.

While market predictions are interesting, don’t use them to alter your long-term investment strategy. No matter what happens in the near term, the stock market is a proven long-term bet. Measured over decades, for buy-and-hold investors, the S&P 500 has delivered historical average returns of about 10%.

Keep perspective when investing for the long haul, with the following mantras:

  1. Accept volatility as a given. If you expect that the stock market could swing wildly in the short term, you don’t need to stress about it while it’s happening.
  2. Keep adding money to the market. By regularly investing in the market over time, a strategy known as dollar-cost averaging, you’ll smooth out the price you pay for investments.
  3. Diversify to reduce risk. A good mix of different types of assets (stocks, bonds, ETFs and mutual funds) will reduce your portfolio’s overall risk.
  4. Stay invested. Selling when you think the market’s peaked and buying when you think it’s bottomed — what’s known as timing the market — is risky and difficult to do accurately, even for professionals. Instead, stay the course to avoid unnecessary trading expenses and possible disappointment.

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