Keon said the market is not signaling a recession although in the heat of December’s downdraft, many strategists said the market was reflecting that fear.
“It’s way too early to say this is the beginning of a recession. the data has been mixed. Industrial production was good,” he said.
However, consumer sentiment plummeted from December’s reading of 98.3 percent in December to 90.7 in January, of 98.3 percent, the lowest reading in more than two years and the biggest drop since September, 2015.
“This report on consumer sentiment is the first concrete evidence that the economy is going to fall and fall hard if Washington does not end the shutdown. It is going to be hard to see real GDP growth of more than 1 to 1-1/2 percent in the first quarter if the consumer goes on a buying strike,” wrote Chris Rupkey, chief financial economist at MUFG.
Keon said he’s positive on the market, but also expects corporate earnings will not grow at all, as earnings estimates continue to decline.
“Once you see that pattern, it usually means you’re going to see estimates continue and this year will be close to zero and has a 50/50 chance of being negative,” he said. “At some point, you’ll look forward to 2020, but with slowing growth and weak earnings that means the upside is reasonably limited … I just don’t think we should expect the really strong start we had to the year means we’re going to have a 20 percent year. That seems very unlikely.”
Hogan, the National Securities strategist, said the weaker earnings growth for 2019 is not really the issue many investors fear it could be because earnings in 2018 received a giant boost from tax law changes.
“The problem with earnings growth is you have to compare it to the year before. Last year was a blockbuster year because you had major tax cuts,” he said. “There were all sorts of things that artificially inflated earnings last year that made the comparison difficult. I’m not much concerned. If we have five to 10 percent earnings growth, considering how much earnings grew last year, I would thank that’s spectacular.”
The S&P 500 has successfully pushed through a level strategists expected to act as a level of resistance, at just above 2,600.
“2,600 had been the lower end of the range for all of 2018. When we dipped below that at the end of the year, significant technical damage was done. We were concerned that would become a ceiling for a period of time but we cut through it on pretty good volume,” Hogan said.