A 20% jump in 2019

It is the year end, the final day of 2018, a year with full of crazes in the market. The intensity and duration of the market volatility has not been seen since the last Great Recession a decade ago of 2008. It is the first time in the past 10 years that we have a seen the stock market for a loss (-6% for S&P). The market has touched the fur of the bear and it is still chased by the bear. Everywhere you see and listen to, it is pessimistic!  This past week, the percentage of bears among individual investors in the weekly AAII survey exceeded more than 50%, a record negative reading. It is coupled by the extreme negative mood as well reported for the newsletter writers per the prestige Hulbert Financial Digest. If you turn on your TV, all you are hearing is that the market is in deep trouble and there is no hope to see in the foreseeable future!   

But believe or not, this is kind of setup that historically almost always leads to a big jump in the next 12 months. And I’m willing to bet that we will probably see a 20% jump for S&P in 2019. With S&P closed around 2500 today, it means we may see 3000 in 2019. Call me crazy but I’m bullish for the new year as I have been talking about this for some time by now. Of course I’m not just blindly making a bullish prediction. Instead, I feel bullish with two major reasons that I think, while being viewed as very negative and the culprit for the market downtrend for now, could become a tailwind for the market in 2019.

• The famous US-China “trade war”. As I have said since the very beginning, I really don’t think we will see a full blown trade war between the two world powers and I think there is a high chance that we will see a good deal worked by the two sides soon. I’m not sure we will necessarily see it done by the current deadline of Mar 1 but even if not,  I think there will likely be some serious progression made to please Trump to extend the deadline. If that happens, watch the positive reaction from the market!
• Then the seemingly hawkish Powell for further rate hikes. But I think the FED may likely yield to the market pressure and may not raise rates at all in 2019. You see, the market has already given Fed “some color to see see” in the past couple of weeks. Believe or not, the Fed is very sensitive to the market. If the market becomes angry, the Fed will likely give in. This has been the case since the Greenspan time till now and I don’t think it will be anything different for Powell. He may talk hawkish to show his strength but in reality he may easily back down to clam down the market if needed. This is what the bond market is telling us right now and it is usually more accurate than what you will hear otherwise. Per the last week data, the Fed funds futures market is pricing in zero rate hikes for the next few years. Simply put, the market has told Powell plain and clear that “you dare not to raise rates further”! If that happens, watch again how the market will react. It will be a very strong propellant for market! The first Fed meeting is in January, followed by March, with the Fed funds market pricing in no rate hikes. I wouldn't be surprised to see a reversal in tone from the Fed during these meetings.

But let me be clear. This is my long term bullish call, nothing to do with near term volatility, which will still be very choppy with ups and downs in a wide range. Such kind of near term high volatility will actually be more of acting as a catalyst for both Trump and Powell to move in the direction as the market wants to see eventually.  So my high level theme for 2019 will be: high volatility for the first few weeks or months that may result in a retest of recent lows around low 2300, followed by strong bullish uptrend triggered by the US-China trade war resolution and clear signal for no rate hikes from the Fed.
STAY POSITIVE FOR 2019!!  👆👊👌