US stocks took another spanking in the last session. We’ll presume this volatility stems from the Fed call due on interest rates this week.
We can throw in the other concerns like the trade war, Brexit and yield curve inversion.
Plenty to worry about, wouldn’t you say?
And yet for the entire stretch of this 9-year bull market, you could have had the same feeling at any point.
I happen to think 2019 is shaping up as a doozy for US stocks…to the upside!
Today’s Profit Watch explains why…
There are two things that are likely to happen this week. One is the Fed will raise interest rates again.
The second is it will moderate its outlook for more in 2019.
There’s a chance the Fed may even only hike once next year.
That’s a big change from the previous perception.
Stock bulls should lap this up.
There’s enough earnings growth on the table – potentially in the double-digit range – to scoop up shares in a big way.
That’s largely without the risk of the Fed cutting off the expansion to contain inflation.
The US market is now under 15 times forward earnings.
Historically, that’s a good buy zone.
What’s the big shift that’s happened here?
The move down in the oil price.
That was the only thing really threatening to take inflation up – besides tariffs – and push the Fed to aggressively lift rates.
The fall in oil is like turning the power off at the switch for a pressure cooker.
Let’s reflect on something…
The S&P 500 on January 2 opened at 2,683. It closed at 2,545 this morning (our time).
So it’s down about 5% for the year so far.
Considering the headlines and sentiment at the moment, it’s a modest decline.
It also doesn’t take into consideration the record amount of dividends paid out this year…which could go up another 6% in 2019.
There’s plenty of scope for the markets to rise next year…
Trump could potentially trigger a frenzy
What it will take is a trigger to shift sentiment back the other way.
A truce in the trade war is the most likely catalyst to spark the fire back under the market.
And the US administration can call it off at any time before the March 2 deadline for the next tariff hikes.
Trump could set off a stock market frenzy if he calls this off and continues to deregulate the US economy…not to mention running huge deficits.
Here in Australia, it’s not as if the business world is a calamity right now.
There are plenty of good announcements coming out.
But the interest and volume just aren’t there to meet them currently.
2018 has been difficult like that.
But I think it’s setting the stage for some big stock moves up next year.
The potential payoff just gets bigger the more these concerns press down on the current market values.
The market is throwing up a lot of compelling buying opportunities if you’re prepared to hold for a reasonable length of time – and can stomach the volatility.
Let’s go back to the oil price for the moment.
A major worry earlier in the year was the pressure this would put on emerging economies.
This was for two reasons…
This worry just got smoked
One was for big energy importers like India. A higher oil price is a big trade burden to carry.
We even saw protests in Brazil about high diesel prices. And the current French riots stem from a tax increase on diesel (although the issues surely run deeper).
The fall in crude takes this stress down a notch.
A second concern was that higher energy inflation would take up US interest rates…and cause the US dollar to rally.
Rising oil and falling currencies were a double whammy for emerging markets.
There’s $3 trillion in outstanding US dollar debt in these markets.
Higher rates make these repayments more difficult.
But oil has fallen and there’s less pressure to raise US rates beyond what’s priced in.
One would think the world has a minor reprieve from this emerging market dynamic for now.
The world sits still for none of us.
But, based off risk versus reward, I still prefer the long side for the medium-term.
A lower oil price gives most emerging markets a lift. Next step?
Find stocks that benefit.
More to come on this tomorrow.