The question posed by the title of this article zeros in on a perennial dilemma that faces not only investors but anyone doing analysis of any kind. Causation or simply correlation? Stock markets took a battering during 2018. UK equities closed the year 8.8% off where they began it and the global damage was 3.%. More concerning is that internationally, by the end of December stock markets had fallen almost 16% from their August highs.
The Federal Reserve raising interest rates, an economic slowdown in Europe, Italian debt, Brexit and the end of quantitative easing from the ECB. More worryingly for many, the growth rate in China has hit a 28-year low, accelerated by a trade war with the USA. It’s understandable that pessimism has crept it after a 10-year bull run. The signs suggest pulling back on risk exposure is the wise move. But is it?
Writing a column for the Financial Times, Ken Fisher, investment analyst and founder of Fisher Investments takes a contrarian view. He expects equities to return a massive 15% to 25% over the course of 2019, an opinion that flies in the face of most others. And one of the reasons is remarkably simple – U.S. president Donald Trump enters his third year in office this year.
Why is that significant? Fisher points out the historical record of the third year of the 4-year political cycles in the USA correlating with positive returns for the S&P 500 a remarkable 91.3% of the time. And the average return over those years has been 17.8%. Those figures date back to the inception of the S&P 500. The only loss during the third year of a U.S. presidency term came way back in 1939 and it was a mild 0.9%.
But why would that be the case? What is so special about the third year of presidency terms when it comes to their positive influence on the country’s benchmark equities index? Fisher highlights the fact the country’s lawmakers turn their attention to the next year’s election, creating a gridlock which acts as a positive catalyst for equities.
Fisher adds more evidence to back up his bullish stance. Based on his opinion Christmas Eve 2018 will prove the be the ‘bottom’ of the recent correction he says:
“The S&P 500 has averaged 34% in the 12 months after corrections bottomed out and 47% after bear markets ended. If Christmas Eve remains the low, this correction ended later in the calendar year than any on record. Hence, simply getting an average post-correction rebound now implies outstanding 2019 full-year returns”.
He adds that he believes fundamental indicators also point to a positive rather than negative global economic backdrop:
• The UK has continued to grow its GDP, albeit slowly, despite Brexit.
• Only 5 developed nations contracted over the 3rd quarter, accounting for just 14.5% of global GDP.
• Their issues are temporary.
• The Conference Board’s Leading Economic Index is high and rising globally.
• World trade is growing at a rate of around 4%.
Fisher puts the late 2018 correction down to U.S. hedge funds liquidating ‘en masse’ after a decade of poor performance and others increased cash allocations in anticipation of January redemptions. That sell-off acted as the catalyst for plummeting sentiment and a degree of panic.
He concludes with the forecast stock markets will begin to rally and that could take hold at any point from now, urging investors to re-enter the market. Of course, it’s one opinion are there are plenty of other opposing views. But Fisher certainly provides some food for thought. Perhaps 2019 won’t be such a bad year for those investing online after all!Risk Warning:
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