After a rough 2018 on the stock markets, a question our readers often ask is: What will happen in 2019. The markets went down hard during the 3^rd quarter of 2018, most notably during the week leading the Christmas. Since then, the various stock market indexes recovered quite nicely, most notably between mid-January and the end of February.

Let’s take a look at where we are heading.

The 2018 Drop

Investors that have been following the markets during the last few years knew that something was brewing. Since the summer of 2017, market commentators were saying out loud that the market was reaching all-time records that were not justified. Some said that after a bull market that almost reached 10 years, the markets HAD to drop.

Two particular items fuelled the drop: The lower than expected revenue growth of 2 Tech stocks (Facebook, Apple), and the rise of the interest rate by the Fed. If you add in the commercial tension between the USA and China, and the rough negotiations between the USA, Canada, and Mexico during the replacement of NAFTA, we ended up with the perfect storm for a drop of the stocks.

Here are some thoughts:

1. The interest rate must be carefully monitored. It obviously has an impact on the valuation of companies, and it may be eventually lead some investors to keep money on the sidelines or to invest on bonds

2. The commercial tensions between the USA, Canada, and Mexico are now behind us. There are some issues to be resolved, however, we believe that we will not see any real impact on North American trade

3. Negotiations between the USA and China are still on-going. This is an item we should monitor. However, we should see an agreement in the following months.

4. Tech Stocks: The darlings of the bull markets have taken a step back. However, the reaction of the overall markets gave too much value to the slowdown of both Apple and Facebook.

5. Market Commentators: They contributed to the fear factor, and eventually fuelled the desire of investors to pull their money out of the stock markets.

It is true that the markets were doing so well since 2009 that it was time for a breather. However, a correction of this magnitude was fuelled by fear more than by rationality.

What to expect in 2019

Now that we lived through the correction of 2018, there are less commentators demanding, or predicting, a market correction. The markets bounced quite a lot since they reached lows at the end of December 2018. This is an indication that large investors decided to inject funds into stocks. Most probably, these investors thought the markets were overbought.

Even if we must remain prudent, here are some thoughts for 2019:

1. Tech Stocks might be in the dog-house for a while until the industry can gain back its growth. I think that long term investors should feel confident that the Tech Industry will bounce back. The deployment of the 5G network could provide the boost required to drive revenues up in the next few years.

2. The Fed seems to be in favor of keeping the interest rates as they are for now. This should mitigate the fear of rising interest rates, at least for the next few quarters.

3. Negotiations between the USA and China are progressing. Until there is an agreement in place, uncertainty will have an impact on stocks because the markets do not like uncertainties. However, we can expect that once a deal is in place, this will provide oxygen to the stock markets to gain back some momentum.

The Botton Line

While we should not experience any excess of confidence from investors, 2019 could be a decent year on the stock market. The markets recovered from their lows of Q3 2018, and we could start to see the impact of the 5G network on income statements of Tech Stocks. Negotiations with China could also lift the uncertainties regarding trade between both countries.