It was a roller coaster ride for the stock market in 2018 as investors had to deal with extreme volatility brought about by a global economic slowdown, political issues, inflation worries, and monetary policy debates. Now that a New Year has arrived, traders are looking for clues about how the stock market might fare. The biggest concern is whether 2018’s events will carry over to this year, or if brighter things will emerge from their aftermath. That said, let’s take a look at some of the top predictions for what’s in store for the stock market in the year ahead.
A Promising Start
The first trading session of the New Year closed on a positive note with a small rise in stocks. The Dow Jones Industrial Average increased by 18.78 points and finished at 23,346.24. Meanwhile, the S&P 500 rose by 0.1% to 2,510.03 and Nasdaq climbed 0.46% to 6,665.94.
In this regard, MarketWatch explains that investors were driven by fears over China’s economy. A private sector survey reveals that manufacturing activity in the country fell for the first time in two and a half years. This fuelled an aversion to assets perceived to be risky early in the day.
A Bullish Year for the S&P 500
While the first day of trade looked promising, it doesn’t necessarily set the tone for the rest of the year. Still, the majority of analysts, including the normally bearish Mike Wilson of Morgan Stanley, see the S&P 500 ending the year at a higher level. Wilson predicts the index ending at 2,750, while Oppenheimer Holdings thinks it will finish at 2,960. On the other hand, the Bank of America has set the target at a 2,900 drop from 3,000.
Meanwhile, Goldman Sachs presents a similar outlook as the Bank of America. Although it is confident that the index will reach 3,000 by the end, the company factors in a 30% probability of a downside scenario where recession fears and tariffs will drive a contraction in market earnings valuation, resulting to a 2,500 fall for the S&P 500.
Year of the Bear?
A few experts believe the market may become bearish soon. Nicholas Sargen, an investment advisor at Fort Washington Investment Advisors, believes that the bull market will continue for the first half of 2019, but the economy will naturally slow down afterwards.
Societe Generale so far presents the most negative forecast for the market. According to a report by Business Insider, the team believes that the bullish cycle that has went on since 2009 is fast approaching its end. The report suggests a 10% drop from its current level, driven by restrictive monetary policy, political gridlock, and trade tensions.
The President’s Next Move
The current tension in the US since the Trump administration moved into the White House is a worry for many, so it’s important to factor in the country’s current administration. Dangers relating to President Trump’s sentiments on imposing trade restrictions started emerging after tensions with China remained unresolved. His comments on tariffs have helped cause more than a 3% drop in the S&P 500.
Positive forecasts are giving analysts confidence that the President will re-enter a trade deal with China. However, cynics see him eventually dragging the market down with budget battles, subpoenas, indictments, and tensions with other countries like North Korea.
What Investors Can Do
In light of these predictions, Goldman Sachs advises its clients to consider cash as it will “represent a competitive asset class to stocks for the first time in many years.” The strategists consider households, mutual funds, foreign entities, and pension funds to be overweight stocks. At the same time, these entities have cash allocations in the lowest percentile, hence the recommendation to raise cash.
It may also be time to reconsider trimming bonds from your portfolio. The Federal Reserve’s rate hikes have already begun affecting bond performance in a negative way. To add salt to the wound, three more rate increases are projected in the near future.
Overall, it’s always a good idea to keep a diversified portfolio in order to protect its value. You can either diversify by owning different asset classes (stocks, cash, bonds) or investing in stocks from varying sectors.