Why the U.S. Stock Market Will Rally 20% in 2019

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“What you’re now seeing is profit and earnings ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.”

– Then-President Barack Obama on March 3, 2009

“[American companies] have record kinds of numbers. So I think it’s a tremendous opportunity to buy. Really a great opportunity to buy.”

– President Donald Trump on December 25, 2018

I bet you didn’t know that in 2009, then-President Obama (unintentionally) made one of the greatest market calls ever…

Identifying the bottom of the U.S. stock market just six days before the start of the longest bull market in U.S. history.

History will judge whether President Trump did the same on Christmas Day 2018.

As we close 2018, only one thing is certain:

It was a year when nothing in the investing world worked.

Deutsche Bank called 2018 “the worst year on record” for investing, with an unprecedented 93% of all investment assets down.

That makes 2018 worse than any of the years of the Great Depression.

2018 also broke all investment precedents.

The traditional fourth quarter rally never appeared. Nor did the start of the usually reliable presidential election cycle rally, which begins in the November preceding a president’s third year in office.

In fact, before the market’s Santa Claus rally last week, this December was on track to be the worst since 1931.

A Uniformly Pessimistic Outlook for 2019

This is the time of year every asset manager, investment bank and major media outlet publishes its investment outlook for the coming year.

Over the past few days, I’ve reviewed 30 reports from the likes of J.P. Morgan, Goldman Sachs and Franklin Templeton.

Each one has its particular take on 2019.

But the title of Bloomberg’s outlook sums it up best:

The Pessimist’s Guide to 2019: Fire, Floods and Famine.”

I find this negative consensus reassuring to my contrarian prediction for 2019:

The U.S. stock market will rebound by at least 20% over the next 12 months.

You may find that prediction crazy…

As did many readers when I made the same prediction for 2017 in an article for Dow Jones MarketWatch.

(For the record, the S&P 500 closed 2017 up 21.8%.)

Here’s why I expect the S&P 500 to do the same – or better – in 2019.

First, the S&P 500 is trading at just more than 15 times 2019’s estimated earnings.

Take out a few technology sector heavyweights – like Amazon (Nasdaq: AMZN) and Netflix (Nasdaq: NFLX) – trading at extremely high price-to-earnings ratios, and the U.S. market is even cheaper than it looks.

Second, I believe that the recent market pullback is vastly overdone.

Almost every data point I look at suggests that what we’ve experienced is a short if painful financial panic rather than the beginning of the next Great Depression.

The negative market sentiment is close to unprecedented. Only October 2008 comes close – and that occurred in the middle of the greatest financial crisis since the 1930s.

Ironically, all this is good news for the market.

Here’s just one of many eye-popping examples of how the market fares after similar bouts of panic, courtesy of sentimenTrader.

This past week, the percentage of bears among individual investors in the weekly American Association of Individual Investors survey exceeded more than 50%.

Hulbert Financial Digest also reported that newsletter writers (like yours truly) are as negative as they have been in recent memory.

In the past, when these two factors converge, the U.S. market has closed up 12 months later 100% of the time.

And the average return on the S&P 500 over this one year?

An eye-popping 34.2%!

Looking at these historical precedents, my prediction of a 20% gain in the S&P 500 for 2019 is almost modest.

Consider that a 20% rally from current levels would put the S&P 500 at around 3,000.

That’s just 70 points above its all-time high of 2,931 on September 20.

The bottom line?

The recent sell-off in the U.S. stock market is a rare event.

As such, it offers terrific opportunities in certain exchange-traded funds (ETFs).

That’s because leveraged ETFs can give you the kinds of returns investing in stocks alone rarely can.

Consider that even as the S&P 500 returned 21.8% in 2017…

A triple leveraged S&P 500 ETF like ProShares UltraPro S&P 500 ETF (NYSE: UPRO) rocketed 71.4% in the same year.

(These are the kinds of ETFs I’ll be recommending in my new ETF trading service, Oxford Wealth Accelerator.)

Market extremes are when big money is made in financial markets…

And 2018 gave us more market extremes than ever before.

That’s why I believe 2019 is going to be a great year for investing.

I wish you a happy and prosperous new year!

Good investing,

Nicholas

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