Modest market growth in 2019, say investment firms

Counting down the days until you can say sayonara to 2018? You’re not alone, as many investors are no doubt eager to put this abysmal year behind them. While there’s still some time left for a rally, if the next two weeks follow the last few, then 2018 will be the worst year for equities since the financial crisis. Unfortunately, 2019 may not be a whole lot better, at least according to some leading financial experts, fund companies and investment banks.

To help MoneySense readers get a head start on planning for next year, we’ve compiled a few of the 2019 market outlooks that have already been publicly released. While prognosticators are often wrong—a February poll of 30 portfolio managers said the TSX would top 16,580 by the end of the year; it now stands at 14,595—it’s still worth seeing what the experts think.

Goldman Sachs: Get defensive

According to Goldman Sachs’ always highly anticipated market outlook, stocks will see modest gains in 2019. The S&P 500 will rise by 5% by the end of next year, closing at 3,000. The investment bank also said the index would finish this year at 2,850, which seems a little optimistic considering it’s down about 2% since November 19, when its outlook was released.

Goldman Sachs recommends people hold more cash than they have in the past and be more heavily weighted to defensive sectors, including overweighting utilities.

While a modest gain is better than a negative one, there’s one thing that could cause markets to underperform: an escalating trade war. “If the full 25% tariffs are levied on all imports from China the earnings impact could be significant, potentially eliminating any profit growth next year,” said Goldman in its outlook.

Morgan Stanley: Dismal days ahead

Mike Wilson, Morgan Stanley’s chief equity strategist is predicting no market growth in 2019. The S&P 500 will end this year at 2,750, which is where it will close at the end of next year, he says. Company earnings will be weak as well. “We expect another range-bound year driven by disappointing earnings and a Fed that pauses,” Wilson said in a note sent on November 26.

U.S. growth will also slow in 2019 to 1.7% year-over-year, according to Morgan Stanley’s economists. Like Goldman Sachs, Wilson says to get defensive. He’s overweight energy, utilities and financials and underweight consumer discretionary and technology, the latter of which has taken a nosedive this year.

BMO: Canada bounces back

Brian Belski, BMO’s chief investment strategist, is more optimistic than his U.S. counterparts. His base case for the S&P 500 is 3,150, while the S&P/TSX Composite Index could hit 18,000 by the end of 2018, up 23% from where it’s at now.

In a report released on November 16, Belski says that “Canadian fundamentals are the strongest they have been in several years. For instance, earnings are consistently exceeding expectations and hitting new all-time highs, profitability is near peak levels, and estimates have been getting revised higher month after month.”

Trade issues, slowing emerging market growth and the steep discount of Canadian crude to West Texas Intermediate has weighted on the TSX this year—and continued oil price weakness is a risk for next year—but, essentially, what goes down must come up. “We believe the steep discount of Canadian equities provides investors with an attractive entry point given our broadly bullish outlook,” he says.

In Canada, Belski recommends overweights in communication services, energy and financials and underweights in health care, real estate and utilities. (“Rising yields, low organic growth and high payouts are a tough combination despite improved valuation,” he writes about Canadian utilities.)

Russell Investments: It all depends on crude

Whether the S&P/TSX will experience another market bust or a much-welcomed boom will depend on one thing: crude. That’s according to Russell Investments, which thinks Canada’s market could hit 16,000 by the end of 2019.

While it says domestic equities are cheap—trailing and forward price-to-earnings ratios are trading below their long-term averages—Canada could become a value trap if oil prices, and more specifically Western Canadian Select, don’t improve.

Canadian company earnings should grow by 12% next year, it says, though it also admits that its prediction may be too rosy, especially if the Bank of Canada continues to raise rates.

“(That) may seem optimistic without a recovery in commodity prices generally, but Canadian crude oil prices specifically,” says the company. “Monetary policy is a watchpoint as we believe the risk of the BoC over-tightening financial conditions should not be dismissed. Taken together, we believe the business cycle on a 12-month horizon is slightly positive as a recession is not imminent, but risks are lurking.”

Most other market outlooks share similar sentiments: Stocks will see some gains in 2019, economic growth will be modest, a recession isn’t yet in the cards and investors should get more defensive. Check back here next December to see who got it right.