Any advisor who decided to sail around the world last January 1 and arrived home in early December might like what she saw in the financial markets over her absence. The first 11 months of 2018 saw an essentially flat S&P 500 in a year that had witnessed a 12% correction and a 16% rally. Throw in GDP growth of 2.9% or 3.0%, a 25% surge in corporate earnings and a contraction of price-to-earnings multiples from 18 to 15, and the advisor might think U.S. equities represent a bargain.

But appearances are often deceiving. Equities entered December after two months of surging volatility. As of this date, December 14, two-day swings of more than 1,000 points in the Dow Jones Industrial Average were becoming the norm. For the first time in a decade, the TINA (there is no alternative to stocks) argument was challenged as yields on cash approached that of stocks, while 10-year Treasury yields topped 3.0%.

After 2018 began with a rare period of synchronized global growth, expansion in many nations stalled out. By year-end, even the resilient U.S. was showing signs of moderating economic activity. In late November, Federal Reserve chairman Jerome Powell briefly calmed financial markets, modifying his language about future increases in the Fed funds rate and saying the current rate was “just under” neutral at 2.2%. On October 3, when that rate was at 2.18%, he had said it was a long way from neutral, revealing a swift change in his perception of economic strength.

Against that backdrop, other concerns surfaced in last year’s fourth quarter. Corporate debt levels have surged in recent years. On-again, off-again trade talks with China began to create bottlenecks in the global supply chain. Even an inversion in a miniscule part of the yield curve sent markets in a flutter. Finally, Brexit and other divisions in the European Union raised questions about the future of the euro.

All that said, many equity strategists are cautiously constructive about 2019. “Next year is going to be better than many think,” says Brad McMillan, chief investment officer at Commonwealth Financial Network. Equities will post an advance in the mid-single digits, he believes, while U.S. GDP should rise by about 2.0% or 2.25% in 2019. McMillan maintains that 2% is the sustainable long-term growth in a mature economy like the U.S.

Phil Orlando, chief equity strategist at Federated Investors, is more optimistic. Earlier in the year, his team at Federated thought the S&P 500 might end 2018 in the 3,100 area on its way to 3,500 by the end of 2019. Now they think 3,100 could be reached by this summer with the recent setbacks pushing back the 3,500 mark until sometime in 2020.

Orlando’s bull case rests on a number of factors. The labor and consumer markets are as strong as they have been in more than decade. Neither financial companies nor consumers are leveraged to the degree they were in previous cycles. In the postwar era, a recession has never started in the third year of a presidential cycle, when the S&P 500 is typically up about 20%, albeit with heightened volatility.

Most business and consumer confidence metrics are at or near cyclical or multi-cyclical peaks. Moreover, unemployment is at a 49-year low and wage growth is at a 10-year high, while lower gas prices are making people feel flush. Orlando thinks GDP growth will slow from 2.9% last year to a still-healthy 2.6% in 2019.

Are The Markets Sending A Message?

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