The stock market could be a real nail-biter for investors in 2019.
If this year's second-half sell-off didn't rattle investors, a panel of local investment advisers surveyed by The Buffalo News thinks it could be more of the same in 2019.
Slower earnings growth, a cooling economy, rising interest rates and fears of a trade war all cast a shadow over the stock market.
But the investment advisers are an upbeat bunch by nature – after all, the stock market averages about annual return of about 8 percent – and they still think the economy will be strong enough to push share prices higher overall, with the Dow Jones Industrial Average and the Nasdaq composite index each rising by about 3 percent in 2019.
"The Trump bump is gone, and now it's all about the balance sheet and corporate earnings," said Kevin McKenna, the president of Main Line Capital Management in Buffalo and one of the panel's bulls.
While some bears agree with McKenna, there is disagreement as far as what it will mean for the stock market. In fact, the local advisers are more divided than usual. While five of them expect the stock market to rise next year, two are forecasting that share prices will drop.
Most of all, though, the split shows that trying to predict what the stock market will do over a one-year period is risky business.
"Evidence tells us that market returns cannot be an accurate forecast for a one-year period," said Patrick Bohen, a senior investment adviser at Dopkins Wealth Management in what likely is the most accurate forecast any of our panel members will make.
"We recommend investors have a long-term strategy that gives them discipline in markets like we saw in 2018," said Bohen, who nevertheless offered the forecast that the Dow will rise by 4.3 percent and the Nasdaq will gain 6.1 percent in 2019.
"The Dow and S&P 500 took all investors on a roller-coaster ride this year," Bohen said. "That kind of volatility separates willful long-term investors from those who lack the tolerance for risk. Know who you are before you invest."
With that said, let's look deeper at what local advisers are thinking.
The bulls see the U.S. economy continuing to chug along in 2019, only a little slower.
Corporate profits will keep growing, though more slowly than this year. Unemployment will stay low and consumer confidence will remain strong, said Steven A. Gattuso, the director of strategy at Courier Capital Corp., a Buffalo money management firm. Gattuso expects a 5 percent gain by the Dow and a 6 percent rise in the Nasdaq, where he believes the sell-off in technology stocks has gone a little too far.
"In our view, the data suggests that a recession is a low probability at this times," said Gerald T. Cole, the managing partner at Arbor Capital Management, an Amherst money management firm.
With job openings outnumbering available workers by 7 million, and companies still pulling money from overseas back into the United States thanks to the tax law that took effect this year, Cole thinks the economy will keep growing, albeit more slowly.
"Strong job markets bolster consumer confidence and spending," said Cole, who expects the Dow to rise by 5 percent and the Nasdaq to increase by 6 percent.
Yet even some of the bulls see warning signs.
McKenna, while a bull, sees plenty of causes for concern in the stock market next year, but after the steep sell-off during the second half of this year, he still thinks it will overcome those hurdles for the Dow to rise 6 percent and the Nasdaq to gain 8 percent in 2019.
In fact, McKenna sounds very much like a bear. He expects the economy to slow. He expects earnings to weaken. He sees the Trump administration's tariffs hurting manufacturers.
But he sees potential in small company stocks that were hit hard by the second-half sell-off.
"Strong balance sheets and steady earnings will be important," McKenna said.
The potential for a trade war with China also worries Anthony J. Ogorek, who runs Ogorek Wealth Management in Amherst.
"There's a high probability that U.S. tariffs go to 25 percent with China unwilling to have the U.S. dictate its domestic policies," said Ogorek, who, along with McKenna, is the most bullish of the bulls in forecasting a 6 percent rise in the Dow and an 8 percent gain in the Nasdaq.
One of the bears in our panel is Tim Johnston, the managing partner at Sandhill Investment Management in Buffalo, who thinks this could be the beginning of the long-delayed bear market for stocks.
For starters, Johnston, who predicts the Dow will be flat for 2019, while the Nasdaq falls by 6 percent, thinks time is the enemy of the stock market in 2019 after nearly a decade of rising prices.
But that's not all. Profits – the key factor underlying individual share prices – got a nice boost from the Trump corporate tax cut last year, but that one-time stimulus won't be there in 2019. Johnston thinks that core profit growth will be tepid as the economy cools – and he believes that cautious investors won't be willing to pay as high of a premium for stocks as they were during the market's peak last summer.
"It all goes back to a cooling economy and slower profit growth," Johnston said. "It always goes back to the profitability of corporate America, and what multiple people are willing to pay for that. The stock market was at unsustainable levels this summer. Valuations were very stretched."
The other bear is David Hartzell, the president of Cornell Capital Management in Clarence. He thinks rising interest rates will be a "huge factor" shaping the stock market in 2019, with the consensus being that the Federal Reserve Board will raise rates two more times next year.
Hartzell, who expects the Dow to drop by 3 percent and the Nasdaq to slide by 5 percent, sees warning signs that the U.S. economy is weakening. The housing market is cooling. Business investment is slowing. And Hartzell sees economic troubles in both China and Europe. If the trade war with China heats up, it could make the slowdown even worse.