As 2019 began, I published My Gut Feeling For 2019. Now that 2019 is in the books, I want to look back at how my expectations and predictions fared in 2019. Recall these predictions were made in the spirit of the old Wall Street Week with Louis Rukeyser show in that they were fixed a year ago and could not change. The original commentary is in lighter print and in bold italics are the comparison to actual results and explanation, as warranted.
1. The SPX ended 2018 at 2,506.85, which using Bloomberg’s Standard & Poor’s 500 (SPX) earnings estimates of about 146.43 implies an index price/earnings multiple (PE) of 17.11. Standard & Poor’s own analysts estimate that SPX earnings for last year should come in at 156.99 implying a year-end index PE of 15.97. Clearly, both sources use different assumptions in their calculations. Either way you look at it, corporate earnings rose handsomely in 2018. Last year I was expecting EPS of 145 with a higher PE ratio of 21. Thus, I was lower on my EPS estimate but too ebullient on the PE for the SPX. Hence, to quote Shakespeare’s Hamlet, “ay, there’s the rub.” The fourth quarter panic caused PE multiple contraction without a meaningful hit to earnings expectations. Understand that every 1 PE multiple (up or down) equates to roughly 6% in market valuation. So, I contend that the 14% decline in the SPX for last year’s fourth quarter was primarily due to PE compression. Looking forward to 2019, bottoms-up earnings as complied by Standard & Poor’s, for its SPX index, are expected to increase to 171.74. Bloomberg’s estimates call for SPX EPS of 171.58. Now both sources are back in line with one another. My belief is that 2019 earnings expectations were cut too much in last year’s fourth quarter. Considering that I expect that there will be a trade deal with China, that the FOMC will be more market friendly (see #2 below) in 2019, that tax benefits from the Tax Cuts and Jobs Acts of 2017 would last beyond 2018, energy earnings hit cyclical troughs and, expecting a softer US Dollar in 2019; my EPS estimate for 2019 is a bit higher at 175.00. The key question is what multiple to apply to my estimates. Clearly, a forward PE of 14.32 (2,506.85 / 175) is too cheap and is just a manifestation of The Powell Panic of 2018. Markets don’t peak until they have traded at around 21 – 22 times earnings for a fair amount of time. I am going to play it safe and use a PE ratio of 17, arriving at a year-end SPX price target of 2,975, an all-time high. Along the way the SPX will hit a low of 2,450 and high of 3,100. – The Standard & Poor’s 500 (SPX) began the year in positive fashion, marking an annual low of 2,447.89 on January 3 and closing the year at 3,230.78, a shade under its all-time high set a few days prior. In May the index declined nearly 7% on China Tariff worries but quickly rebounded in June. August, a normally slow month for stocks was the only other month to post a decline in 2019. SPX earnings under-performed my expectations due to a strong US dollar, trade tensions, and the impact of Boeing’s (BA) 737-Max problems; which not only impacted BA but also many other industries, both upstream and downstream to BA. Continuing lower interest rates generated market PE expansion as well to a level of about 20. That places PE at a high level, but short of a peak level to necessitate getting cautious in 2020 (more on that in My Gut Feeling For 2020). All told, I was pretty much on target for these predictions. More importantly, I did not fold my cards during the year, though I did have a nice hedge which paid off handsomely across all strategies at one point during the year. Thus, clients will be extremely happy once they receive their 2019 performance reports. Remember that those reports and our billing invoices will be available on BridgeFT Atlas website.
2. The Federal Reserve Open Market Committee (FOMC) raised Fed Funds target by ¼% four times in 2018. One positive development of The Powell Panic of 2018 is that Fed Chairman Jerome Powell has gotten religion and sees the errors of his ways. He will not be as dogmatic in 2019, rather, Powell will learn a lesson from his predecessors and become more data dependent. Quantitative Tightening, that is contracting the Fed’s balance sheet, will be enough to achieve monetary goals in 2019. The Fed Funds rate ended 2018 at a target range of 2.25% to 2.50%. Expectations per the Dot Plot indicate two tightening rounds each of ¼%. Fed Funds futures are pricing in no rate changes in 2019. I expect one ¼% tightening to take place in the June or July meeting. The FOMC will not be a Grinch in 2019 as it was in 2018. – In 2018 the Fed was not our friend. In 2019, it was, and you did not want to fight the Fed. The FOMC was more aggressive in cutting rates in 2019 than I expected, with ¼% rate cuts delivered in July, September and October. While I was off the mark, it was as a matter of conservatism.
3. That insatiable appetite for US Treasury securities I have been writing about for years will keep going like the Energizer Bunny with pension managers and foreign investors gobbling up Treasury auctions and secondary paper in 2019. Such appetite is so rampant that it is spreading to mortgage bonds such as FNMAs. Furthermore, this continued credit boom will fuel further corporate buybacks, acquisitions and dividends. As to the slope of the curve, it will remain much the same in 2019 as it did at the end of 2018. However, I do expect a parallel shift in the yield curve across all maturities, such that by the end of 2019, the US Treasury market will yield as follows: 5-year 2.75%; 10-year 3.00%; and, 30-year 3.25%. – Despite some momentary and inexplicable inversion in the US Treasury yield curve, the yield curve was normally sloped for most of the year and at year’s end. Rates however, across the curve were lower than I predicted. Again, this was a positive for the stock market.
4. We are still in a growth-oriented market. It is just that growth stocks became value stocks during The Powell Panic of 2018. While we remain in an investment mode which favors large cap stocks, there should be a reemergence of opportunity and hence demand for small cap stocks. So, it may be time to add exposure to the Russell 2000 (RUT) which has some catching up to do. – Growth stocks were the place to be in 2019. There were many small cap stocks that performed beyond my wildest dreams while others disappointed. As for the Russell 2000 (RUT), that index gained 23.72% in 2019. From an index perspective the RUT only bettered the Dow Jones Industrials (INDU) and did so by 1.32%. The INDU was the worst performing major index of 2019.
5. On a micro basis, you got a gift from the market panic which created deep discounts in the technology sector. There is no reason to abandon growth tech, though you may want to overweight software and underweight or abandon social networking and internet stocks. I am going to favor medical devices, especially in the diabetic sector. Energy will have a dead cat bounce while financials will remain in Missouri as they need to show me some compelling reason to devote capital to that sector – Tech Growth had a spectacular year. Apple (AAPL) rose an astounding 86%; Microsoft (MSFT) 55%; and, Facebook (FB) 56%. The S&P Software Index rose 34% in which we had several holdings. Diabetic Medical Technology stocks were outstanding and contributed to our Growth Strategy’s out-performance for the year. Financials performed at index levels, better than I expected. Energy stocks had an early year dead cat bounce, as I anticipated, but spent the rest of the year on a roller coaster with the SPDR Energy Sector ETF rising a mere 9% for the year.
6. The US economy did reach escape velocity in 2018, while the fourth quarter may have felt some weakness from the US/Sino tariff dispute. Those clouds will lift in the first quarter and should benefit GDP the rest of the year. Continuing job growth, benefits from the 2017 tax law, strong consumer confidence and resurgence in the economies of emerging markets will benefit the US Economy. I expect GDP in the US to grow by: 2.7% in 1q; 3.5% in 2q; 3.7% in 3q; and 3.8% in 4q.- The US is still the best house on the global street. Economic growth as defined by Real Gross Domestic Product (GDP) rose 3.1% in 1q; 2.0% in 2q and 2.1% in 3q. GDP for the 4th quarter will not be released until next year’s 1st quarter. Growth was likely stunted due to tariff concerns, Brexit uncertainty, and slowing growth in China. On the brighter side, inflation in the US remains tame.
7. Cyclical lows for Crude Oil below $50/bbl., will be left behind, as the economy continues to grow, and the US Dollar weakens a bit. Crude oil prices will trade between $50 and $65 for most of the year as global overproduction and gluts of liquid gold diminishes. There will be no place to hide in energy, unless, like in LakeView Asset Management’s Dividend Value Portfolios you want to own a little Exxon Mobil (XOM) for the yield. Otherwise, just underweight the sector. – I was correct on all aspects of this forecast.
8. 2019 will, once again, be an interesting year in politics. So, what else is new? There are no noteworthy elections, but the entertainment value will remain high in Washington, D.C. To begin with, the government shutdown will cease and we can once again enjoy the Panda Cam. President Trump will begin construction on the wall (or whatever structure you want to call it) along the nation’s southern border. It will come in under budget and on time. Nancy Pelosi will step down as her (yet undisclosed) battle with Parkinson’s disease no longer allows her to function on a full-time basis. Joe Biden will declare his candidacy for POTUS as he will be considered the Obi Wan Kenobi “you are my only hope” for the Democratic Party in 2020. An assassination attempt on President Trump will be foiled by the FBI and/or secret service. – Yes, the government shutdown ended on January 25 after 35 days and President Trump got another $1.375 billion for 55 more miles of wall on the southern border. Nancy Pelosi is the Congressional Energizer (ENR) Bunny and keeps on going and going. Joe Biden did announce his candidacy and is a current front runner for the Democrats. However, with the recent entry of Michael Bloomberg and Tom Steyer to the race, Biden is not exactly an Obi Wan Kenobi.
9. Facebook (FB) will go into a tailspin in more than one way. The stock will fall below 2018 lows. Cheryl Sandberg will be forced out, but to save face she will voluntarily step down. A conga line of executives will follow her out the door. Apple (AAPL) announces a surprise acquisition / merger. Possible targets: Netflix (NFLX), IBM (IBM) Salesforce.com (CRM), Take-Two Interactive (TTWO) and, Roku (ROKU). Another possibility is that AAPL buys a large stake in Vudu partnering up with Walmart (WMT). Apple needs to get into the cloud and/or expand its entertainment service revenue in a big way. Tim Cook will achieve that goal via the M&A route. – For FB, I was totally wrong. As for AAPL – the company did make some nice acquisitions but none of the magnitude which I predicted. Of greater importance was AAPL’s move into streaming with the introduction of Apple TV+ which did fulfill my expectations, albeit in a different way; with AAPL choosing the build versus buy strategy. AAPL is also making large investments into 5G technology.
10. In a partial repeat of a 2018 prediction, Ruth Bader Ginsburg will pass away or be forced to retire because of failing health and be replaced by Amy Coney Barrett. This time around, there will be no three-ring circus nomination process as there was with Brett Kavanaugh. – Nope. Not yet at least. Notorious RBG is the SCOTUS Energizer Bunny. Funny enough, RBG and I went to the same elementary school, PS 238 in Brooklyn (about three decades apart) and she swore my cousin into the NY Bar.
Best wishes for a Happy and Healthy 2020. As always, please contact me if I can help you with your investment needs or for media appearances. Also, feel free to post your comments / questions to My Gut Feeling and pass it on to relatives, friends and colleagues throughout the year.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long AAPL, BA, MSFT, DIA, DDM, UDOW, SPY, SSO, & SPXL; although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right-hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
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