FICS Editors' Note

The Barron’s fall survey of professional investors was conducted Sept. 21 to Oct. 8, near the start of the recent market selloff.

Stocks will rally more than 10% in 2019, big money poll predicts

  • By Vito J. Racanelli,
  • Barron's
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America’s money managers seem confident that the aging bull market in U.S. stocks can trot into its 10th year in 2019. Based on the findings of Barron’s fall Big Money Poll, 56% of professional investors are bullish on U.S. equities through next June, little changed from 55% in our spring 2018 survey.

About the poll

Barron’s conducts the Big Money Poll twice yearly, in the spring and fall, with assistance from Beta Research in Syosset, N.Y. Our latest survey drew responses from 162 professional money managers from across the country. The survey was open from Sept. 21 to Oct. 8.

What’s more, the bulls see solid gains ahead for stocks. Their mean predictions put the S&P 500 index (.SPX) at 3078 by the middle of next year, and 3166 by the end of 2019, reflecting increases of 10% and 13%, respectively, from a recent 2800.

While the Big Money Poll was taken just before the market’s steep slide this month, most managers interviewed by Barron’s say the selloff is part of a normal correction. “The U.S. economic outlook still looks pretty good,” says Scott Horsburgh, president of Provident Investment Management in Novi, Mich. “Corporate earnings continue to grow nicely, and [stock] valuations aren’t out of line.”

Nearly half of Big Money managers consider rising interest rates or policy missteps the biggest threats to stocks today. That’s down from 67% six months ago, a drop that seems consistent with the managers’ growing approval of President Donald Trump. More than half of poll respondents give the president’s performance a B grade or better, up from about a third in our spring survey. While many indicated in write-in comments that they disapprove of Trump’s negotiating style, they consider the results positive so far for Corporate America.

Fourteen percent of managers think earnings disappointments pose the biggest risk to the market—double the tally of six months ago. More than half of poll respondents see profits rising 6% to 10% next year—nothing to sneeze at, but a far cry from the 20% gains analysts expect this year.

Poll respondents consider equities the most attractive asset class. Forty-two percent favor U.S. stocks, up from 24% six months ago, while 29% expect emerging markets to do best, down from 46%. Emerging markets have fallen about 15% in dollar terms this year, while the S&P 500 is clinging to a gain of about 4% after its recent rout.

The Big Money bulls’ optimism is buttressed, in part, by their rosy outlook for the U.S. economy. About 60% of managers see U.S. gross domestic product expanding by 3% or more in the next 12 months, even though fewer see gains for the global economy.

Interest rates typically rise as the economy grows, and that’s just what poll respondents anticipate. A full 80% predict that 10-year U.S. Treasury yields will hit 3.5% or more in the next 12 months, significantly above Friday’s 3.2%.

There are economic and technical reasons for such an increase, says Gregory Melvin, chief investment officer at Pittsburgh-based C.S. McKee, who pegs yields at 3.5%. With the Federal Reserve unwinding its Treasury buying and the federal government issuing more debt, an excess supply of bonds is pressuring prices and pushing up yields. In fact, current economic activity under more-normal conditions—that is, when central banks aren’t suppressing rates, as they have done for the past 10 years—would justify a 10-year yield of 4%, he says.

Nearly 60% of respondents say entitlement reform and reducing federal spending ought to be Congress’ top priorities after the midterm elections. Then again, the legislators get little respect from this crowd: 84% of respondents give Congress a grade of C or less.

Only 9% of managers identify themselves as bears in the latest survey, down from 11% in the spring. Overall, their sentiments run counter to their clients’. The managers report that about a fifth of clients are bearish, and 23% are bulls.

Poll respondents are plenty bearish about some popular trades, including Tesla (TSLA), cryptocurrencies (92%), and marijuana stocks (68%). Their views are more evenly split on the FAANGs— Facebook (FB), Amazon.com (AMZN), Apple (AAPL), Netflix (NFLX), and Google parent Alphabet (GOOGL)—which drove much of the market’s gains until this month. Says Robert Medway, a managing partner at Royal Capital Management in New York: “Company by company, except for Amazon, all have issues. They won’t grow as fast as they have in the past, and we don’t own the group because of valuation.”

Will the bears’ ranks swell if stocks keep sliding? We’ll check back with the Big Money in the spring.

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