Deep panic in later stages
Jim Paulsen, The Leuthold Group’s chief investment strategist, thinks that after the ugly December for markets, investors’ panic is in the later stages. Before the rally on December 26, the S&P 500 (SPY), the Dow Jones Industrial Average (DIA), and the NASDAQ Composite (QQQ) lost 15%, 14.6%, and 15.3% of their value, respectively, in December. While we still need to wait and see if the rally on December 26 meant a sustained turnaround or was just a dying gasp, there’s no denying that investors are still in panic mode. The slightest bad news could lead to a sell-down again.
Close to the bottom
According to Paulsen, the rally is positive for the market outlook in 2019. According to CNBC, Paulsen said, “We’re getting close to the bottom.” He added that the negative sentiment is “getting close to burning out.”
In How to Position as Fund Managers Turn Extremely Bearish, we highlighted how fund managers are turning bearish with bond allocations surging and equity allocations declining. Among fund managers, 53% think that global economic growth will decelerate in the next 12 months. The latest outlook is the worst it has been since October 2008. These factors could suggest that we’re close if not already at the bottom.
The major reasons for markets’ sell-off have been concerns regarding the US-China trade war, the Fed’s rate policy outlook, earnings and margin deceleration, and other geopolitical uncertainties in the US and abroad.
Paulsen thinks that we could see a reversing trend in bearish indicators. If the economic reports become even softer, we might see the market celebrate. Softer data would probably be able to convince the Fed and bond vigilantes (AGG) (BND) that rates shouldn’t go up. In the absence of higher rates, markets can keep rising. Paulsen also thinks that after the recent sell-off, the valuations are at a much more sustainable level. These factors could help bring the S&P 500 to all-time highs in the first half of 2019. Currently, Paulsen likes emerging markets (EEM), energy (XLE), and other beaten-down sections of the market.
Among equities, focusing on companies that have grown their earnings consistently and have solid balance sheets is usually a good strategy. In late cycles, investors can also increase their allocations to cash, fixed income (TLT), and precious metals (GLD) (SLV).
To learn more, read Dalio’s Advice on How to Prepare for the Next Downturn.
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