'We Expect Another Rangebound Year': Morgan Stanley's 2019 Investing Outlook

After a promising start to 2018 for U.S. investors, the market is seemingly limping to the finish line. The S&P 500 is now down 0.2 percent overall in 2018.

Morgan Stanley analyst Michael Wilson outlined key themes that investors can expect in 2019 in a report out this week. 

More Of The Same?

Unfortunately, Wilson said investors can expect more of the same from the stock market next year.

“After a roller coaster ride in 2018 driven by tighter financial conditions and peaking growth, we expect another rangebound year driven by disappointing earnings and a Fed that pauses,” he said.

Morgan Stanley’s lack of confidence in the stock market is indicated by its base-case year-end 2019 price target for the S&P 500 of just 2,750. That target represents only a 3 percent gain over the next 13 months.

Rolling Bear

Wilson said the U.S. is currently in a “rolling bear” market that will continue in 2019. Unlike a typical bear market, rolling bear markets shift from sector to sector in the market, hitting the weakest stocks in each sector the hardest.

Wilson said 90 percent of the price damage in the current rolling bear market has likely already been done, but investors may only be halfway through the bear market in terms of duration.

Following a year of tax cuts, Wilson said corporate earnings will likely mostly disappoint in 2019 and stock valuation ranges will likely continue to narrow.

Earnings Recession

Morgan Stanley forecast about a 50-percent chance of a mild “earnings recession” in 2019, which Wilson defines as two consecutive quarters of year-over-year declines in S&P 500 earnings. Yet he said the market impact of this recession would likely be mitigated in large part by the Federal Reserve putting its interest rate hikes on pause by midyear.

Value stocks will play an increasingly important role for investors as interest rates rise and investors become less likely to pay for stocks that they see as overvalued, Wilson said. 

How To Play It

In light of this shift in investing preference, Morgan Stanley upgraded the consumer staples sector to Overweight and upgraded the real estate sector to Equal-weight. At the same-time, the firm downgraded the industrial sector to Equal-weight.

Wilsonsaid he prefers large-cap stocks over small-cap stocks headed into 2019.

Investors who want to follow Morgan Stanley’s recommendations should consider increasing their exposure to the Consumer Staples Select Sect. SPDR XLP and the SELECT SECTOR S/RL EST SELECT SECTO XLRE and decreasing exposure to the Industrial Select Sector SPDR Fund XLI.

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