2019 U.S. Stock Market Outlook

In my last post dated November 3rd, 2018, I forecast a 20% correction from the all-time highs set for most major U.S. stock market indices in early October 2018. 

• The Nasdaq 100 corrected 23.4% from its intra-day high on October 1st at 7,700 to its intra-day low on December 24th at 5,895.
• The Dow Jones Industrial Average corrected 19.4% from its intra-day high at 26,952 on October 3rd to its intra-day low at 21,712 on December 26th.
• The S&P 100 Index (formerly known as the OEX) corrected 20.5% from its intra-day high at 1,310 on October 3rd to its intra-day low at 1,041 on December 26th. 

(Please see charts below)

The rebound in U.S. stock prices from December 26th through December 31st was monumental, but still left December 2018's investment return as the worst  December since 1931.

Despite the fact that U.S. corporations bought more than $1 trillion of their own stock back in 2018, every major U.S. stock market index closed down on the year. Record corporate profits in 2018, not withstanding, failed to inspire investors as historically high valuations and steadily rising short term interest rates weighed heavily on overall share prices.

As promised last year, the Federal Reserve steadily tightened U.S. monetary policy in 2018 by raising its Fed Funds rate three times and by selling $344 billion in Treasury securities and Mortgage-backed securities from its bloated portfolio which now stands at $3.88 Trillion. The Fed is currently projecting three additional 1/4-point hikes in 2019, although the financial markets are only predicting two hikes (as indicated in the Fed Funds futures markets).

My own view is that the Federal Reserve will only raise interest rates one more time (at most) in 2019, as the economy rolls over into recession early in the New Year. Here are some additional thoughts about the New Year:

1. The current rebound in stock prices which began on December 26th will soon peter out, and new reaction lows will then be established early in the 1st quarter of 2019.

2. I strongly believe that U.S. stock investors have underestimated the negative financial impact of the "Blue Wave" which is currently washing over the country in the political arena. It is my prediction that Democratic hopeful Beto O'Rourke will be elected President in the 2020 election. Massive corporate tax cuts that were signed into law last year will be then be scaled back as Democrats win the White House and a majority in the Senate to match their current majority in the House of Representatives.

3. Investigations of the Trump Administration, already meaningful from Robert Mueller's Special Counsel's Office, will pick up speed and momentum as Democrats take control of the House of Representatives on January 2nd, 2019 after picking up 40 seats in the November 2018 election.

3. When Robert Mueller's final report is made public (probably in Q-1, 2019), pressure on President Trump to resign could be overwhelming. From my vantage point, it looks almost inevitable that President Trump will need to "negotiate" a deal involving pardons from Vice President Pence for himself and his family in return for his pledge to resign from office. This assumes, of course, that Vice President Pence is NOT also implicated in "high crimes and misdemeanors" within the Special Counsel's final report. It also assumes that "President" Pence would grant Mr. Trump the pardons he may need to avoid prosecution. While pardons from Mr. Pence are likely, this action may doom any Presidential hopes Mr. Pence may have in the 2020 election (just as Ford's pardon of Nixon in 1974 doomed Mr. Ford's effort in the 1976 Presidential Election).

4. In 2019, I believe that corporate buybacks will be greatly reduced as compared to the record pace of 2018. I believe that corporate profits will significantly under-perform current expectations as profit margins are squeezed coincident with a dramatic slowdown in the U.S. economy.

5. If the economy falls into recession, the Federal Reserve will react too slowly to bail out stock investors. 

Bottom line: When the current bear market rally fades, which I think will happen in early January 2019, I am forecasting another 20% decline in the major stock market averages from the January 2019 peak. Cash will be king for the first half of 2019, at least!

Nasdaq-100 Index Monthly Chart with Computer-generated Buy & Sell Signals

Dow Jones Industrial Average Monthly Chart with Computer-generated Buy & Sell Signals

DJIA Weekly Chart with Computer-generated Buy & Sell Signals plus 200-week MA

S&P 100 Index Monthly Chart with Computer-generated Buy & Sell Signals

S&P 100 Index Weekly Chart with Computer-generated Buy & Sell Signals plus 200-week MA

U.S. Midterm Elections and The Great Silent Majority

Who is the great silent majority and how will they vote on Tuesday, November 6th?

Some have called this year's midterm elections the most important U.S. election in the history of our Republic. You can include me in that group!

Let's talk about the American voter immediately ahead of Tuesday's elections. Extraordinary recent research by RealClearPolitics.com may offer meaningful clues to accurately forecasting this critical U.S. national election. After surveying 2,463 registered voters, Real Clear Politics concluded that there are five separate "tribes" in America right now as follows:

1. The Resistance (rabid anti-Trump Democrats)       26%

2. Independent Blues (lean Democrat)                        24%

3. Detached (indifferent, least likely to vote)              24%

4. Mainline GOP (lean Republican)                            14%

5. MAGA (rabid Trumpsters)                                      12%

From this analysis, what's immediately obvious to me is that the Democrats outnumber the Republicans by almost 2 to 1 !! Could this be right? Is there ANY other research which may support this conclusion?

YES, THERE IS!

As incredible as it sounds, there was only one major polling organization that actually got it right in 2016 when it predicted Trump would win the Presidential Election against Hillary Clinton. That organization is still active in this election cycle and it just published what may be THE MOST controversial survey of any reputable pollster as it relates to the generic ballot.

The latest poll of 3,922 adults by the USC Dornsife/LA Times, conducted Oct. 21-27, found that 57 percent of likely voters said they plan to cast their ballots for Democrats in the Nov. 6 midterm elections, compared with only 40 percent who plan to vote for Republican candidates. THIS IS AN INCREDIBLE 17% SPREAD IN FAVOR OF THE DEMOCRATS !! IS THE GREAT SILENT MAJORITY ABOUT TO SPEAK? For perspective, most mainstream polling organizations are indicating that the Democrats may hold "just" an 8% advantage in the generic ballot.

Quite frankly, I can't believe main street media isn't talking about this. And Wall Street pundits have clearly missed this news and the monumental implications it has on financial asset prices over the near term AND longer term investment horizons!

BOTTOM LINE: The above research points to ONE obvious conclusion: The Democrats will win EVERY race that is now considered a "toss-up" by mainstream pollsters, as last minute deciders break in favor of the Dems. This translates into a pickup of at least +44 seats in the House of Representatives and +2 seats in the Senate. YES, if the above research is correct, as I am inclined to believe, the Republican Party will lose its majority in BOTH Houses of Congress!!

Armed with the above research, in all the key Senate races, the easy "toss-up" races to forecast now are the following:

Nevada             Dems Win!

Indiana              Dems Win!

Arizona             Dems Win!

Florida              Dems Win!

Missouri            Dems Win!

In "Red" states Utah and West Virginia, Democrats will win easily!

In my view New Jersey was NEVER in doubt!  Dems Win!

So that leaves the really tough races in North Dakota, Tennessee, and TEXAS.

Yes, TEXAS is in "caps" for a reason!  While I don't think Heidi Heitkamp (D) can overcome her 8-point deficit in North Dakota (GOP will probably win that seat), and in Tennessee former Democratic Governor Bredesen has a decent shot at winning Bob Corker's Republican-controlled seat (but he may lose to Congresswoman Blackburn in a close final vote), the most important Senate race in the country right now is in Texas.

I think the outcome here is obvious, but I am clearly in the minority. I strongly believe that Beto O'Rourke (Democrat) will upset (and unseat) Senator Ted Cruz (Republican) to become the next Junior Senator from the Great State of Texas!

If Beto wins, then by my count, that means the Dems will control 51 seats in the Senate against 49 for the GOP when the new term begins in January 2019! This assumes that Independent Senator Sanders from Vermont and Independent Senator Angus from Maine will caucus with the Democrats. 

Nate Silver and his extraordinary team of pollsters (and statisticians) at FiveThirtyEight.com are indicating ONLY a 16% chance that the Democratic Party will win majority control of the Senate this coming Tuesday, November 6th. In my view, Mr. Silver and his team have grossly "under-weighted" and under-appreciated the key research quoted in this column. Momentum and turnout potential are variables that are clearly favoring the Democrats right now, and majority control of the Senate is NOT out of reach for the Democratic Party. Early voting is already up by more than 50% from 2014 (the last midterm election). And more importantly, early voting among voters under the age of 30 has more than tripled over the pace of 2014! It's not a stretch to speculate that these young voters are favoring the Democrats in this election cycle!

Now that we have accurately forecast Tuesday's election, what does all this mean for U.S. stocks, U.S. bonds, the U.S. Dollar, and Gold prices immediately ahead for investors. (And please read my previous column for what this election may mean for President Trump if majority control of both the House and the Senate flips to the Democrats!)

Even with perfect vision of Tuesday's upcoming election, winners and losers on Wall Street are not obvious. I remember when Bill Clinton won the presidency in both 1992 and 1996. Most traders and investors thought the U.S. stock market would crash. Of course, just the opposite happened! We had the best 8 years in stock market history! Who would have guessed!

Seeing as I am probably the only one in America who thinks the Dems will win majority control in the Senate this coming Tuesday, November 6th, here is my best assessment of winners and losers on November 7th and beyond:

1. U.S. stocks will lose at least 20% after the November election over the next 6 months

2. U.S. bond prices may drop initially after the Dems dominate on Tuesday, but then "flight to quality" forces will begin to prevail which will support Treasury securities prices (but not corporate bond prices) over the intermediate term

3. The U.S. Dollar will fall as a direct result of uncertainty in U.S. politics and a subtle change in monetary policy by the Federal Reserve (rate hike threats from the Fed will halt, and the financial markets will begin to see a possible easing in monetary policy as the U.S. economy slips into Recession in Q-1 2019)

4. Gold, Silver, and precious metals stocks will soar!

Here is the monthly chart for the S&P 100 Index, formerly know as the OEX Index. As you can see, a rare sell signal was triggered by my computer trading algorithm at the end of October 2018.

S&P 100 Index Monthly Chart with Computer-generated Buy & Sell Signals