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2019 could be the mirror image of 2018 for US stocks

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The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Edward J. Perkin, CFA, Chief Equity Investment Officer, Eaton Vance Management

      Boston - Last year was particularly frustrating for stock investors because profit growth was very strong, but pretty much every asset class underperformed cash.

      It just goes to show you once again that it's not enough to follow the news; it's also important to identify what has already been priced in. Overall investor positioning and sentiment are important.

      A story of positioning

      I think the story of the last several months -- the late-2018 sell-off and quick early-2019 bounce -- is one of positioning. Investors got very negative in late 2018 on fears that tariffs and China's slowing economy could trigger a global recession. Also, the December swoon was likely exacerbated by tax-loss selling. I believe the reversal so far in 2019 can also be explained by positioning.

      Although fourth-quarter earnings are still coming in, it looks like U.S. corporate earnings grew more than 20% in 2018, based on the S&P 500 Index, helped by the corporate tax cut. That's tremendous profit growth, yet the U.S. market was down last year even though we didn't see any major geopolitical events as some had expected.

      Blog Image SPX Earnings Growth Feb 11

      Now, in 2019, I expect profit growth to slow to low single digits. But I think we may have a good year for U.S. stocks since positioning was so negative to start the year. As firms report fourth-quarter earnings, some companies with mediocre results are seeing their stocks rise anyway, which is an encouraging sign. The fear of risk in late 2018 could be morphing into fear of missing out.

      Rates' role and China

      Interest rates have a powerful impact on the performance of the overall equity market. And with the Federal Reserve signaling patience on further rate hikes, investors aren't fighting the Fed. I think we could be moving back into the 2012-2017 framework when flat or down rates were not a headwind for stocks. With the Fed signaling rate hikes on pause, this could be a good backdrop for stocks.

      And regarding long-term rates, the 10-year yield is around 2.7%. This is historically low but currently high on a global basis considering many developed-country yields are near zero or even negative, including Japan, Germany and Switzerland. This could act as a restraint on U.S. long-term rates.

      Meanwhile, credit spreads in areas like high-yield corporate bonds and bank loans have compressed recently after widening in late 2018. So, credit markets are settling down, which is another good sign.

      Bottom line: Looking ahead, a resolution in the China-U.S. trade war is a potential catalyst that could boost stocks in 2019. The dissipation of these risk overhangs in 2019 could help price-to-earnings (P/E) multiples to expand, even if profit growth isn't very strong. That's why 2019 could end up being the polar opposite of 2018.