Just as December’s selloff was likely overdone, January’s rebound may reflect too much optimism about recent events.
January’s stock market gains have certainly been welcome, but they don’t necessarily indicate smooth sailing ahead. I believe we may be in the midst of a relief rally—a short-term rebound from December’s harsh downturn—not a sustained upswing that investors should jump on.
Fact is, the market sold off so much last December that it didn’t take much good news to send stocks higher in January. The S&P 500 is up 6.5% so far this month. But I’m not yet comfortable that the worst is behind us. I wrote last week about how Washington policy choices could be a risk for markets. There are at least three more areas that still signal caution:
- Earnings could disappoint: Analysts have lowered their earnings expectations for this year, but perhaps not by enough. Companies are facing higher costs for wages and debt service and profit margins could slip. The financial and tech sectors face their own particular headwinds. Managers at many companies have expressed more moderate expectations, but they aren’t yet reflected in stock prices.
- The Federal Reserve may continue to hike: Based on Treasury futures markets, many investors think that the Fed won’t raise rates again this year. But that’s not what Fed officials have indicated. I believe the Fed may just pause in the early part of this year and resume hiking in June and possibly December. That additional tightening isn’t currently reflected in stock prices.
- China’s economy may not rebound as much as expected: Investors have taken heart that the Chinese government is adding more stimulus to the economy. But challenges there are increasingly complex. I can’t rule out the possibility that unexpected policy changes could lead to increased volatility in global markets in the coming months.
While I’m encouraged by recent market developments, I think there is still risk that these three areas could disappoint investors. My expectation remains that the market will be range-bound in 2019. For investors, the watchword now is patience.