We hope you enjoyed January, because the rest of the year will be so-so. That is Goldman Sachs’ message to clients following the best performance for the year’s first month in three decades.
An unappetizing stew consisting of “a slowdown in earnings growth, higher rates, and tighter financial conditions” should keep stocks from a boffo performance as the rest of 2019 unfolds, Goldman indicated.
“We argued that a modest bounce at some point early in the year was likely, and if investors missed it there would be a risk of missing the bulk of the returns for the year,” the firm’s analysts wrote.
January’s rally was in marked contrast to the late-2018 downturn, when stocks came close to dropping by 20%, which indicates a bear market. The S&P 500 is up about 9% this year. This goes far beyond the typical January Effect, a tendency of stocks to rally as investors buy to replace year-end tax-loss harvesting sales.
Earnings thus far for last year’s fourth quarter have been better than many feared, although analysts’ estimates are dropping for quarters in the future. FactSet Research projects a year-over-year decline in earnings growth of almost 1% for the first period of 2019. Such a negative turn would be the first decline in more than two years.
At the moment, stocks are buoyed by the Federal Reserve’s seeming pause in hiking short-term interest rates and less-ambitious depletion of its bond holdings, which affect long rates.
But the Fed has left open the possibility of resuming its tightening behavior if, as it’s fond of saying, the data suggests that would be prudent. For once, when Fed Chairman Jerome Powell addressed reporters last month to announce the central bank’s thinking (and not heralding a rate boost), the market didn’t go down.
Goldman indicated that, “while we saw a bounce in equity markets in 2019, we also argued that this would be followed by the resumption of a ‘flat & skinny’ trading range, with relatively low equity returns.” There’s some comfort in that Goldman doesn’t see another downward jolt, such as the one the market endured in December.
There’s a bit of a disconnect between these comments and Goldman’s official forecast, though. Going forward, the firm believes the market will eke out just meager gains. From here until the end of 2019, it expects further increases in the S&P 500, which will be around 10%, close to what the index scored in January.
In other words, if you were out of the market in January, you missed half the uptick.