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John Engle
John Engle
Articles (258) 

Stock Market Forecast: 3 Big Banks Weigh In on 2019 Prospects

JPMorgan, Wells Fargo and BofA offer a diverse outlook

January 22, 2019 | About:

2019 appears set to be a year of historic importance. Fears that the post-Great Recession bull market will come to an end are mounting, as are fears of outright economic downturn. There are countless factors at play, but that has not stopped some top analysts and institutions from making a stab at prognostication.

Most big investment banks have issued their forecasts for the year ahead. The outlooks presented by Wells Fargo ((NYSE:WFC), JPMorgan Chase & Co. (NYSE:JPM), and Bank of America (NYSE:BAC) share a number of similarities, but each offers a different take on the unusually uncertain future.

Wells Fargo: End of easy money

The pleasant and stable bull market that has marked the last decade has come to an end, according to Wells Fargo. In its forecast for 2019, the bank expects rougher waters ahead:

“2018 brought an end to exceptionally low volatility and above-average asset returns across equities, fixed income and currencies. Trends of the past decade - equity and bond prices rising together, domestic markets outperforming international markets, outsized investor performance coming from only a few equity sectors - are now shifting. We are not living in a world of smooth sailing, and investors must be more stringent in 2019 when positioning their portfolios to achieve gains and pare risk.”

Volatility and uncertainty will unquestionably be looming larger than they have in the placid years of the recent past. The big shifts deriving from an economic slowdown, trade disputes and a host of other economic headwinds could all serve to hamper the market. Investing will indeed be anything but easy.

We agree with some of Wells Fargo’s advice to investors. Paring back exposure to rate-sensitive assets such as REITs may be prudent. However, we are more skeptical than the bank when it comes to stock market growth. Indeed, Wells Fargo projects stocks rising as much as 20% from the 2018 close. With so many economic headwinds in play, we hazard a soberer view of the overall market.

JPMorgan: Soft landing not certain

JPMorgan’s 2019 outlook is far from ebullient. While the economy is strong at present, risks abound that could see a slowdown become something worse:

“Entering 2019, the U.S. economy looks remarkably healthy, with a recent acceleration in economic growth, unemployment near a 50-year low and inflation still low and steady. (In July 2019), the expansion should enter its 11th year, making this the longest U.S. expansion in over 150 years of recorded economic history. However, a continued soft landing, in the form of a slower but still steady non-inflationary expansion into 2020, will require both luck and prudence from policy makers.”

JPMorgan also highlights the risks created by higher mortgage rates, tightening labor markets and expanding trade conflict. All of these factors will likely conspire to slow growth, crimp markets and potentially even tip the economy into recession.

We concur with JPMorgan when it comes to these clear risks. They will be hard to overcome, especially given the late age of the long bull market. There is evident danger in the market ahead -- and those dangers may only be magnified throughout 2019.

Bank of America: A little more optimism

Bank of America’s outlook is surprisingly enthusiastic, with a fairly confident view of stocks overall:

“The Standard and Poor’s 500 Index is expected to peak at or slightly above 3,000 before settling in at a year-end target of 2,900...Earnings growth also is likely to slow in the U.S., though the near-term outlook remains somewhat positive. We forecast earnings per share (EPS) growth of 5 percent, which would put the S&P 500 EPS at a record high of $170 next year.”

Despite acknowledging the likely slowdown in earnings growth, Bank of America forecasts solid stock market performance, despite wisely recommending paring back investments from rate-sensitive asset classes such as real estate, as well as cyclical businesses such as automakers. Still, the bank projects stocks as a whole to rise more than 15%. That sounds awfully ambitious given the many economic headwinds in play.

We are dubious of Bank of America’s overall market outlook. However, we do agree for the most part with the bank on what sectors will likely do best under current conditions, especially health care and financials. Its recommendation to overweight technology, however, looks less inspired, especially in light of the precipitous fall experienced by high-flying tech stocks in reaction to a minor interest rate hike. We would be more cautious in our allocations than Bank of America to be sure.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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