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Last year was the worst year for stocks in a decade. But with 2018 in the rearview, it's time to take a look at what's ahead for the markets in 2019.
While there were some big single-day rallies in December, there were many more single-day debacles. And together, they made the final month of 2018 the worst December since the Great Depression.
Pundits point to many possible reasons why it was such a volatile – and bearish – month. Whether it was the threat of a trade war with tariffs or the U.S. Federal Reserve raising interest rates and taking a very hawkish tone, volatility spiked up to levels not seen in over four and a half years.
Investors are right to wonder how this can be in light of the strong economic numbers we've seen recently.
That's what makes the financial markets so exciting – and potentially so lucrative. While the stock market and the economy are certainly related, they do not always move in lockstep. And that means investors can bank some big profits by identifying when they are indeed out of sync and ready to move back together.
Money Morning Executive Editor William Patalon, III, and Money Morning Technical Trading Specialist D.R. Barton, Jr., sat down to help us figure out what's in store for us in 2019.
More importantly, they gave us three moves to make to profit from what's ahead…
This Is What the Experts Forecast for the Markets in 2019
Patalon believes investors need to understand the narrative behind how the market got to where it was in December.
Clearly, he said, the "Trump Growth Narrative" was dominant since the 2016 election. That included tax cuts and the rollback of regulations that helped fuel stocks higher since 2016.
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More recently, the Fed narrative took over as it continued with the process of "normalizing" interest rates and "unwinding" their balance sheets. In other words, Chair Powell and company believed the economy was strong enough to end its loose money policies. Near-zero short-term interest rates are now rising, and the Fed is selling billions of dollars' worth of U.S. Treasury debt it purchased after the financial crisis.
This isn't what led to the December sell-off. What got investors worried was the speed and scope of the Fed's execution.
To recap, the economic growth story fueled a growth surge in the stock market, but the Fed's latest narrative led to the December sell-off.
Now, Barton and Patalon are looking to the next narrative to understand where markets are heading in 2019…
The New Market Narrative Is Good News for Your Money
Before Christmas, Barton laid out two scenarios for the coming year. One is a strong bounce and the other is a volatile market that keeps the bears in charge.
The bear market would materialize if stocks could not muster any strength to end the year. Because we got a bounce as the year closed, Barton expects to see the positive trend to continue in 2019.
Barton suggests trading the big cash-generating tech stocks for quick returns. Since these led the market down during the pullbacks, they'll be bounce the highest now. But since this is still a bounce and the market is still going to be volatile, don't overstay your welcome. Employ a strict risk-management discipline, including stop losses.
One of the best stocks to use for this strategy is Microsoft Corp. (NASDAQ: MSFT).
"I love trading MSFT right now because of its strong cash flow position," Barton told us. "It doesn't get slammed as much in the neck-snapping down moves as the FANGs do."
And if you're looking for some stocks to buy and hold for the long term, Barton's got you covered there, too.
Take a look at Pfizer Inc. (NYSE: PFE) or Agilent Technologies Inc. (NYSE: A). Pfizer is on a great run, and we expect that to continue, while Agilent is bringing AI tech to the pharmaceutical sector. We aren't alone either. Eighty percent of analysts covering the stock recommend it as a buy.
Of course, this bullish bounce may not last. That's why you'll want to keep an eye on what's going on with China.
Both of our experts agreed that the biggest wild card is the potential deal with China. So far, the market seems to believe that there will be a deal, otherwise it might be down quite a bit more than it already is. Failure to make progress here in the first quarter will rattle the markets in a big way.
Conversely, a firm deal with protection for intellectual property could keep the market's bounce going and possibly lead to a "melt up," as tensions ease.
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