What difference can a month make? For the U.S. stock market, it could mean that the possibility of a bear market, which so many had feared, is in the rearview mirror — at least for now.
Think back to the end of December. The S&P 500 had come just to the brink of entering a bear market (defined as a slump of 20% or more from a recent high, based on closing levels) and Google searches for “bear market” reached an all-time high.
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One month later, the S&P 500 had jumped 9.6% from its December low in its strongest January showing since 1987, such that it was down a not-so-terrifying 7.7% from its September high. And all that happened in the midst of the longest U.S. government shutdown in history.
Have those fears about an impending bear market been put to rest? Not exactly. While professional investors see opportunity in the stock market, they also see reason to be cautious. Here’s what they’ll be watching in February:
Trade talks are key
Many investors are looking for some middle ground after being whipsawed by the market in recent months. If the bearish sentiment that fueled plummeting prices in late 2018 was overwrought, perhaps too was the bullish sentiment accompanying January’s strong rebound.
The market is saying one thing and economic data is saying another.
Where stock prices go from here depends largely on the ongoing trade negotiations with China, according to Tim Courtney, chief investment officer of Exencial Wealth Advisors. Anxiety about trade has been the primary driver of market volatility, he says, rather than some imminent risk of a U.S. recession (defined as two consecutive quarters of GDP declines).
“It doesn’t make sense for such a steep pullback without a pretty steep deterioration in economic health,” Courtney says. “The market is priced as though we’re going into a recession; the market is saying one thing and economic data is saying another.”
At the top of Courtney’s wish list for February? Continued progress in the talks between U.S. and Chinese leaders that point to “verifiable and actionable changes to tariffs and regulatory and trade impediments,” he says.
What to do now: From Courtney’s vantage point, “the entire market looks like it’s on sale,” even after January’s rebound — and U.S. stocks will continue to look attractive even with gains of as much as 15% from current levels, he says. That’s why Courtney is recommending his clients “buy a little of everything,” including U.S. large-cap stocks (tracked by the S&P 500), small-caps (tracked by the Russell 2000) and even international stocks.
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But lingering risks remain
Investors mostly shrugged off the December-January federal government shutdown, but the furlough of government analysts in multiple agencies means that key economic reports will be delayed. From GDP to new-home sales to retail performance over the holiday season, among others, the data in these reports is closely scrutinized by investors, economists and Federal Reserve policymakers.
There’s always something to worry about.
While central bankers aren’t scheduled to meet in February, investors are trying to predict how aggressively the Fed will raise rates this year. The lack of economic reports makes that guessing game problematic, says Brian Jacobsen, a senior investment strategist at Wells Fargo Asset Management.
“It’s really a question of playing catch-up with the backlog of data releases that were put in abeyance with the shutdown,” Jacobsen says. “The Fed relies on some of this data to help inform their policy decisions, so without that data, they’re operating without complete information.”
Meanwhile, investors are questioning whether “some softening of the economic data” could mean central bankers are close to done with interest-rate hikes, Jacobsen adds. The Fed had signaled it would raise interest rates only two times in 2019, following four increases last year, but suggested after its January meeting that rate hikes could be on hold for now.
What to do now: “There’s always something to worry about,” Jacobsen says, including uncertainty surrounding Fed policy, along with ongoing trade talks and the status of Brexit (or the withdrawal of the United Kingdom from the European Union). Still, some stocks could fare better than others. Progress on the U.S.-China trade talks could spark a “broad-based relief rally” that would favor emerging-market stocks, he says.
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Stock market forecast
Given the recent volatility in the stock market, it’s no wonder there’s little consensus about the forecast. If professional investors can agree on something, it’s that volatility likely will continue. In 2018, the S&P 500 saw daily moves in excess of 1% up or down about one of every four trading days. That’s since increased to more than 30% of trading days thus far in 2019.
In terms of stock market predictions, recent surveys highlight the divergence in views:
- Wealthy U.S. investors (those with at least $1 million in a self-directed brokerage account) don’t believe the stock market has bottomed yet, and 56% of respondents describe themselves as bearish about the market, according to a survey conducted in mid-January by E-Trade and provided exclusively to CNBC.
- Wall Street strategists are forecasting the S&P 500 will end the year at about 2,950 — or about 9% higher than its current level — according to the average forecast of strategists surveyed by CNBC. Even the strategist whose prediction was most prescient for 2018 (Mike Wilson of Morgan Stanley) is forecasting a gain of 1.7%.
- Retail investors aren’t so optimistic yet, however, with nearly 32% expecting stock prices to be lower in the next six months, according to a weekly sentiment survey conducted by the American Association of Individual Investors. Such bearish sentiment has been above its historical average for 18 of the past 20 readings.
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If professional investors can agree on something, it’s that volatility likely will continue.
Whether you’re bearish, bullish or somewhere in between, it’s hard to argue with the stock market’s long-term investment merits. The S&P 500 has delivered historical average returns of about 10%. While monthly gyrations can be tough to stomach, it’s important to keep perspective when investing for the long haul.
The following mantras can help:
- Volatility is a given. If you expect the market will swing wildly on occasion, you don’t need to stress about it while it’s happening.
- Maintain an investing discipline. By regularly adding money to the market over time, a strategy known as dollar-cost averaging, you’ll smooth out the price you pay for investments.
- Diversification reduces risk. A good mix of different types of stocks and bonds, as well as assets from other geographic regions, will reduce your portfolio’s overall risk.
- Don’t try to time the market. If you try to sell when you think the market’s peaked, not only do you risk being wrong, but you’ll also rack up related trading expenses and set yourself up for potentially lower returns elsewhere.