Wall Street’s predictions for 2019

Taxes… Wall Street’s predictions for 2019… This year’s charity donation goes to…

Q3 hedge fund letters, conference, scoops etc

Let’s start by reviewing the recent U.S. TAX CHANGES:

1. Individual tax rates:  Individual tax rates are set as:  10%, 12%, 22%, 24%, 32%, 35%… and 37% for the top 1% of Americans with income in excess of $500,000 per year for single tax filers and $600,000 for joint filers.  Because of the loss of some deductions, anyone that was near the top of an old bracket may be kicked up into a higher tax-bracket under this plan.
2. Corporate tax rate: lowered from 35% to 21%.
3. Pass-through tax rate:  S-corps, LLCs, partnerships and sole-proprietorships, including those owned by trusts and even those that pay no wages whatsoever, would be allowed to deduct 20% of their income as long as their income is below $315,000.  For income above that level, the deduction would be limited to half of the W-2 wages or the individual’s portion of the pass-through entity’s income.  Someone in the 37% tax bracket could reduce their tax burden down to 29.6%.  Anyone that can create multiple, small pass-through organizations (rather than one larger one) may benefit.  The new law would make it more profitable for pass-throughs to own their property (in a separate entity) rather than rent and to own their equipment rather than lease and, unfortunately, to automate as many jobs as possible.  Many pass-throughs will now file to become C-corporations to save even more.  High income earners that do not act to protect their income will absolutely pay higher taxes and perhaps as much as 10% more, and this would be dumb.
4. Allows businesses to fully expense new equipment right away.
5. Investments:  No changes to long-term capital gains and dividend tax (which is already low in the U.S.) and no changes to cost-basis accounting for stock sales (which is good).  Short-term capital gains are taxed at the tax bracket level, so this may be reduced for many investors, which is good.  Corporate money diverted into share buy-backs and dividends would benefit stock holders.
6. The Obamacare tax of 3.8% on investment income has been left to eventually implode on its own.
7. Take-give-take:  No longer allowed to write off moving expenses, alimony payments or tax preparation.
8. Anyone that is age 65 or older still gets to take the $1300 Additional Standard Deduction and…
9. Everyone gets their “standard deduction” doubled to $12,000 per person, but this then eliminates the charitable giving tax write-off for 90% of American filers.  There are far reaching effects to this tax change!
10. The $4050 per family member personal exemption is eliminated, so a young married couple with two kids loses $4050 even with the standard deduction doubled, but…
11. The child tax credit is doubled to $2000 per child, making an actual loss of $2050 for a married couple with two kids (which is then offset by opportunity to be in a lower tax-bracket).
12. Eliminates the Children’s Health Insurance Program for the poorest children in America.
13. AMT:  Much harder for individuals to be hit by the Alternative Minimum Tax… a big gift to the rich.  Corporations now have no AMT to worry about.
14. Mortgage deduction: allows up to a total of $750,000 in bank loans to be deducted and this also applies to second homes but not to home equity lines of credit.
15. SALT:  State and local and property tax deductions are capped at $10,000 total.  This predominantly hits Democrat states in the North East region, Great Lakes region and the West Cost.
16. Estate tax: Doubled to exempt $11-million (or $22-million for couples).
17. Deductions for small business expenses are still allowed, although it does eliminate ‘unreimbursed’ employee paid business expenses.
18. High level medical expenses are still deductible.
19. Retirement accounts:  There are no changes to any retirement accounts such as IRA, SEP, ROTH or 401k.

Summary of Wall Street predictions for 2019…  I’ve taken the liberty of condensing 3000 pages of institutional summaries into one paragraph each with a “super summary” at the end.   Color coding for U.S. =  BULLISH – NEUTRAL – BEARISH 

• Credit Suisse:  Based on fundamentals, we don’t think that the 2018 pullback we had in this market was ever justified.  We think that you eventually have significant upside from December’s low.  We started the 2018 year with a very expensive market and this year we’re going in with an inexpensive market, so we may have the setup for a big and profitable surprise.
• Oppenheimer Funds:  The U.S. economy is slowing, the result of higher interest rates and a persistently strong U.S. Dollar (USD), as macro conditions in much of the rest of the world appear to be stabilizing.  We expect an elongated market cycle.  Inflation is largely under control so the Federal Reserve is likely to back off.  We expect the rise in the USD to moderate against other major currencies and this may give a boost to commodities.  We are still bullish and feel that stocks remain cheap relative to bonds.  Quality dividend-growth stocks may outperform.
• ECU Group:  There is a possibility that the U.S. market could rally strongly well into next year, as a blow off top.  For most other countries, such a move would be a bear market rally.  The U.S. economy is not likely to go flat for 12-18 months and the stock market might anticipate that turn by six months.  U.S. economic growth is likely to be robust next year, but in a slowing trend.  Low volatility, high quality dividend-growers and large cap stocks to outperform.  It is time to add some bonds back into one’s portfolio.
• Fundstrat Global Analysis:  We believe that 2018 was only a mid-life crisis in a 20 year bull market.  Long term investors should just hunker down because the market will be much higher in 10 years.  Near-term, if sentiment gets especially bad, stocks will really take off.  S&P-500 may gain 21% in 2019.
• Jeremy Siegel (Wharton School & Wisdom Tree Funds):  I am not worried about defaults in corporate bonds that others seem so worried about.  First, the average corporate bond has a longer maturity than used to be the case.  Secondly, our banks are extremely well capitalized, better than ever before; they are flooded with liquidity.  So, during the next downturn, I don’t think that the banks are vulnerable at all.  And the chance of an economic recession in two years is only 50%, but a continued Trade War brings the date forward.  Near-term, even with the economy slowing, we could have quite a good year in 2019… with stocks up as much as 15%.
• Nomura Research:  The U.S. stock market rebounds through 2019 while the rest of the globe weakens.  By the second half of 2020, the U.S. economy could see a much different story.  Stocks would anticipate worsening conditions and begin to drop in early 2020.  Tailwinds for 2019 include the easing of the Trade War, Chinese stimulus, corporate buy-backs of shares on the open market and CAPEX spending by corporations.
• Goldman Sachs:  Growth is likely to slow a bit in 2019, but no recession.  The slowdown should come gradually, with growth remaining above trend in the first half of 2019 (because of self-sustaining momentum) before slowing later in the year.  Any meaningful deceleration in 2019 would help to reduce risk and could ultimately extend the life of the current bull market, making it the longest in U.S. history.  The unemployment rate will fall to 3% by 2020 causing higher inflation.  It is likely that job growth will not slow until early 2020.  While further escalation of trade tensions with China appears likely, we find minimal effects on the U.S. economy.  Our recession risk model indicates that recession risk is still quite low in 2019.
• Morgan Stanley:  U.S. stocks under-perform relative to the prior years of this bull market.  Both developed and emerging market stocks improve.  The USD remains strong.  Still bullish on stocks in general.
• Russell Investments:  We believe that 2020 marks the danger zone for a U.S. recession, which gives equity markets some upside in the year ahead.  However, late-cycle risks are rising and monitoring these risks will be crucial.  2019 will feature volatile equity markets that deliver an estimated 8% return.  Inflation pressures will build so we’re positive on commodities.  Emerging market stocks may be threatened by trade wars.  We already like the value offered by U.S. Treasury-bonds.
• Deutsche Bank: We find ourselves expecting the current expansion, which is set to become the longest on record next year, to continue through 2019.  This change in view comes at a time when the consensus and market pricing are moving in the opposite direction.  Growing expectations of a recession after 2020.  We expect core inflation to rise and we anticipate three rate hikes in 2019.
• Wells Fargo Economic Group:  We forecast that the expansion will remain intact into 2020.  Although the Federal Reserve has been hiking rates, monetary policy is still accommodative.  The economy has strong momentum behind it at present which should keep the expansion intact.  Business confidence is buoyant, thereby underpinning investment spending and employment growth.  The most striking feature of the current expansion is the absence of any obvious excesses.  Inflation could rise more rapidly in the coming months.  Although moving slower in 2019, the U.S. Federal Reserve is still likely to hike rates at a faster pace than other major central banks, thereby supporting the USD.  Higher rates have weighed on the housing market with prices currently peaking and heading down.
• UBS:  Stocks are cheap; based on history a 20% rally is on the way.  A lot of negativity has already been priced in.  Earnings are up 20% but the stock market is down.  In 2019, the market will get it right.  Buy U.S. stocks (the rest of the globe is weak) because the United States will still have fiscal stimulus working through the system in 2019.
• CFRA Research (Sam Stovall):  Investors are playing the game of “scared” right now.  Earnings will slow down only because the bar has been set so high, but we are not heading into a recession.  We’re bullish, with a lower case “b,” but 2019 does start with a double digit discount in stocks.
• Evercore ISI (Ed Hyman, voted Wall Streets #1 economist for 38 years running):  Corporate profits are peaking, but history suggests that this means that the next recession is still a far ways off.  Economic data is still very healthy, although construction and home prices are already feeling ill.  Our general feeling is for a U.S. recession in 2020. The Fed likely pauses.  Disruptive and innovative company stocks will lead into the future.
• Franklin Templeton Investments:  The global economy holds the potential to maintain solid momentum in 2019, underpinned by strength of U.S. fundamentals and demand.  We also hold a constructive view on real assets, including commodities.  In 2019, we expect Treasury yields to rise.  We favor assets that typically perform well during the latter stages of the market cycle or offer explicit inflation protection, although inflation currently remains moderate.  Over the longer term, we continue to see tremendous opportunities in disruptive and innovative company stocks.
• Leuthold Group:  The longest bull run in history will continue.  Investors should get aggressive although volatility may continue for awhile longer.  The Federal Reserve will pause.  We’re going to skip a recession in the foreseeable future.  We think that we’re going to have a pretty good 2019.
• Commonwealth Financial Network:  Housing is rolling over.  The most reliable leading indicators are signaling that stocks may keep going up throughout 2019.  Fundamentals are solid so any draw-downs should resolve quickly.  The risks are more political than economic.  Inflation will remain at what the Fed considers acceptable.  In 2019, revenue growth is expected to remain strong and this should support continued growth in earnings.  The S&P-500 is likely to reach 3000 before the end of the year.
• Legg Mason:  Economic indicators continue to signal that a strong U.S. economy should drive positive global growth.
• Invesco:  We continue to believe that exposure to risk assets is important for meeting long-term goals, especially given that we see a continued upward bias for stocks.
• Wisdom Tree:  As the glow from the 2018 U.S. tax cuts fade, we expect the growth outlook to soften a bit in 2019.  A recession does not seem likely.  The Treasury-bond market is likely to be range-bound.
• First Trust Advisors:  The benefits to U.S. growth from having a lower corporate tax on profits and less regulation are going to take years to play out.  Companies and investors around the world have only just begun to react to the U.S. being a more attractive place to operate.  Lower unemployment rate.  Higher wages; increasing inflation.  Federal Reserve raises rates only two times in 2019.  We’re calling for the S&P-500 to finish 2019 at record levels (3100) which would represent a nearly 25% gain.  “Grit your teeth if you have to; those who stay invested in the year ahead should earn substantial rewards.”
• Blackstone:  The S&P-500 gains more than 15% in 2019.  Growth stocks beat value.  Top sector picks are technology and commodity plays.  Next recession postponed until 2021.  No Fed rate hikes.  Gold drops to $1000.  Emerging markets are stronger than last year.  China will grow by 6%.  China “makes a deal.”  The USD moves sideways.
• Fidelity:  U.S. recession risks remain low, but late-stage [of the market cycle] is likely to prevail in 2019.  Leading Indicators remain solidly positive in North America while dropping in Europe and China.  Global growth remains positive even while China weakens.  U.S. consumers continue to benefit from improved job conditions and repaired balance sheets.  U.S. wages to improve.  USD to remain strong.  It is too early to become bearish.  Instead, diversification should be prioritized.  Add commodities plus high-yield and investment-grade bonds.  The S&P-500 P/E (Price-to-Earnings) is currently at 14 when it actually should be at 18; this makes U.S. stocks very attractive for 2019.
• Guggenhein:  We won’t see the end of this U.S. bull market until we see a breakdown in the leading economic indicators & the yield curve and an increase in the unemployment rate.  Europe, Japan and China are already weakening.  The stock market should become very strong through April.  We expect the buyback wave to peter out sometime in 2020 and for the junkiest of corporate bonds to then enter the danger zone.  Possible recession sometime in 2020 (or even 2021) and we now expect an eventual deep sell-off of 40-50% off of a future record peak in stock prices.  Bullish U.S. stocks.
• Regions Bank:  An awful lot would have to go wrong for the U.S. to slip into recession in 2019, and while the probability of recession rises once we get into 2020 (because of fiscal tightening), that is not a foregone conclusion.  2019 should prove to be another year of solid growth for the U.S. economy.  Growth to be sustained by consumer, government and business spending.  Growth strong and above trend.  Wages steady but weak.  USD sideways.  CAPEX strong.  Inflation rises.  Housing very weak.  Federal Reserve backs off.  Biggest risk is trade policy.
• The World Bank:  Emerging markets will completely stall in 2019 and there are dark clouds hovering over developed markets, but the United States stock market is still strong and it will have a GDP of over 2.5.  We do not see a U.S. recession in 2019, but a slowdown or something worse is possible in 2020 or 2021.  The greatest global risk would arise from a protracted trade war.
• S&P Investment Advisory Service:  The market is cheap and it over-corrected in 2018 causing a P/E that is lower than it should be.  In 2019, earnings will be better than expected so there will be no earnings recession.  The market should be especially strong during the first half of 2019.  If there is any weakness, it might arrive closer to the end of the year.

SUPER SUMMARY:

1. S&P-500 to gain over 20% in 2019
2. Developed markets relatively weak
3. Emerging markets move up from low valuations but lack strength
4. No U.S. economic recession until 2020 or 2021
5. Fewer Federal Reserve rate hikes
6. China continues its attempt to revive their economy
7. USD remains strong, but it near-term gyrates sideways
8. Gold to gyrate sideways
9. Commodities to move up in price, particularly energy
10. Inflation rises moderately
11. Wages rise slightly
12. Treasury-bonds to gyrate sideways, but they still help to offset stock losses during corrections
13. High-yield and investment-grade U.S. corporate bonds to move higher
14. Bank-loan “bonds” drop lower
15. Volatility (VIX) moves into a higher trading range
16. Trade war and impeachment, both “Trump issues,” are the biggest risk factors for global markets
17. U.S. home prices continue to zig-zag lower (and home prices are already crashing in other parts of the world)

Calculated economic recession chances 6 months out have now increased to 8%, which is still extremely low.  The 10 year long bull market trend channel is still holding (chart posted @ open on January 15, 2019):

As I’ve been predicting for over a year now:

YOUR 2018 DONATION:  Each year, we take a chunk of the money earned from client fees and donate it to a quality charity.  One of our criteria is that the majority of money raised by the organization has to go directly to the intended beneficiaries and not to the management salaries of the charity.  This year’s donation is going to  KaBOOM!  which is an organization that builds community playgrounds for children in underprivileged neighborhoods.  And we’d like to thank MarketCycle’s clients for this donation!

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Article by Stephen Aust, MarketCycle Wealth Management