This week has been particularly educational regarding the stock market at a pivotal juncture. The lessons should be taken seriously by owners of variable annuities and fixed indexed annuities and for tens of millions of owners of annuities of all stripes who also invest in the stock market outside of annuities.
Despite an aging economic recovery and bull market, the U.S. economy is very robust and corporate earnings growth – the linchpin of stock prices – is downright fabulous. Yes, there are all kinds of concerns out there, including persistently rising interest rates and an ugly trade war with China, but the bottom line is that the economy and the stock market continue to have legs. While stock market volatility has returned big-time in 2018 and is highly likely to remain, there is no good reason not to expect the market to continue to climb in 2019.
Senior market investors should continue to stay the course. Through mid-October, the S&P 500 is up 5%, excluding dividends. Add them into the mix, and that is almost a 7% gain. Where else today can you reap gains like that in a liquid investment — or for that matter, pretty much any investment?
The key lesson this week – or, for seasoned investors, the important reminder — is that the bull market, while the oldest ever by some metrics, is not wobbly. In the end, robust profit growth almost always takes center stage. As early as the start of this week, the S&P 500 had shed almost half of its 2018 gains in October. Then, on Tuesday, the market skyrocketed, posting its best performance in six months. Stocks appropriately responded to the start of the gush of blockbuster third quarter earnings reports.
If you want to appreciate just how well corporations are faring, here are some examples:
- UnitedHealth Group, the parent of the nation’s largest health insurer, said net income in the third quarter soared 28% from a year earlier. The company raised its full-year earnings projection for 2018 and offered reassurance about its early outlook for next year. It said growth drivers included continuing expansion of private Medicare plans.
- Johnson & Johnson reported higher revenue and profit on the strength of improved pharmaceutical sales. In particular, global sales of J&J’s cancer drugs skyrocketed 36% year-over-year. Overall sales of the pharmaceutical unit, its biggest business, rose nearly a healthy 7%.
- Goldman Sachs Group and Morgan Stanley reported sharply higher third quarter earnings. Buoyed by Trump administration tax cuts and strong deal-making revenue, profit rose 19% at Goldman and 20% at Morgan Stanley. All six of the largest U.S. banks have reported higher profits. Going forward, a big plus is that the biggest banks are more balanced and less specialized than they were a decade ago.
- Airliner United Continental Holdings, the third-biggest U.S. carrier, reported an earnings increase of 36%. It also increased its 2018 profit outlook for the third time this year. Higher fares and increases in passengers in select key markets are offsetting surging fuel prices.
- Walmart lowered its profit targets, citing its recent acquisition of Indian e-commerce company Flipkart for $16 billion, part of effort to ramp up its web business. But revenue – the ultimate driver of profits – is doing fine. The retailing behemoth projected that sales in existing stores will rise a healthy 2.5% to 3% next fiscal year, continuing a string of solid sales gains.
What about the negatives outside of the market?
They are troubling, to be sure, but probably not as worrisome as many media reports suggest, at least not any time soon. U.S. economic growth is expected to slow in 2019 to about 2.5%, down from about 3%, possibly somewhat more, this year. This is because the stimulus from tax cuts is expected to fade. Nonetheless, this forecast, if accurate, would mean that the economy would grow faster than it did in 2017 or 2016.
Meanwhile, there are a record 7.1 million unfilled jobs in America, according to the Department of Labor. If they start to get filled, that would be an unexpected plus for the economy. This would also help maintain an 18-year high in American consumer confidence.
As for the stock market next year, continued optimism seems to be in order even though earnings growth overall is expected to slow to 8% to 10%, down from 20%-plus in recent quarters. Some market pros say the primary driver next year will be earnings multiple expansion.
2019 predictions are mostly pending, but one firm, Credit Suisse, recently forecast a healthy double-digit increase by the end of next year, fueled by solid economic growth and negligible recessionary risks. Too sanguine? Perhaps. But the price increase could be markedly less and still be good. It would certainly beat a 4% return, if that, on a fixed annuity.
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