Is the bull market over or nearly done? That’s the big question facing investors and advisors on these last days of the year.
It was always just lurking under the surface of market outlooks that for the first time in a long time mentioned recession, not as a likelihood but as a concern that could grow if not for 2019 then for 2020.
Then the last Federal Open Market Committee meeting of the year took place and the bear looked more ready than it has in nearly 10 years to end its hibernation. The day after the FOMC meeting, Dec. 20, the Nasdaq finished 19.5% below its high for this cycle and fell into bear-market territory the next session. The Dow Jones industrial average and S&P 500 were off about 15% from their cycle highs.
“The stresses evident in markets indicate that the equity correction has further to run in both time and possibly price, consistent with the history of past 10%-plus post [financial crisis] corrections,” wrote Julian Emanuel, chief equity and derivatives strategist at BTIG, and his colleague Michael Chu, an associate equity strategist, in a note.
“A lack of progress on the China trade war front increases the probability that the correction could morph into a bear market in 1Q, even without a recession on the horizon, similar to 1998.”
That bear market lasted only about two months.
On the flip side, many strategists expect 2020 will be a positive, though volatile, year for the U.S. stock market, with modest gains.
“We don’t think the bull market is over, but we do believe we’re in the beginning stages of the ending process,” writes Christopher Hyzy, chief investment officer for Merrill Lynch and U.S. Trust. “We expect U.S. gross domestic product growth of around 2.5% in 2019, and for equity markets to rise about 5% from their year-end levels, in line with growth in corporate earnings.”
Charles Lemonides, portfolio manager at Valueworks LLC, is more optimistic. He says 2019 “could be a really positive year for equities” because the economy can continue to expand, adding roughly 200,000 jobs a month. “It takes a lot to turn that around and change direction.”
But there is confusion in the market, as highlighted by the stock market’s reaction to the Fed’s last meeting of the year, which makes for a shaky outlook for next year.
After the Federal Reserve announced it was raising interest rates 25 basis points, as expected, and lowering expectations for rate hikes next year to two from three previously, U.S. stocks sank. The Dow was down as much as 513 points while Fed Chairman Jerome Powell spoke at his press conference and, along with the S&P 500, finished 1.5% lower, down more than 2,200 points for the month to date.
Previously the stock market had welcomed signs of fewer-than-expected rate increases, but this time it seemed disappointed that the central bank was planned on raising rates at all despite the fact that most Wall Street strategists have been forecasting between two and four hikes next year.
Some commentators blamed the market plunge on Powell’s comments that the Fed’s unwinding of its quantitative easing assets was set to autopilot because it is essentially another mode of a tightening. Others mentioned the lack of a specific reference to the volatile stock market.