Is a market turn on deck? Mike Larson reviews and previews his 2019 outlook. Larson will be speaking at the Las Vegas MoneyShow May 13-15.
Baseball season is underway, and with spring upon us it is a good time to look at our 2019 market calls and share what we expect for the remaining innings of 2019.
First, let’s talk about the Lyft (LYFT) IPO. I’ve been warning about the lousy quality of the offerings Wall Street has been dumping on the public markets. Last summer we noted that more money-losing companies were going public than even at the peak of the dot-com bubble.
Lyft, the ride-sharing company, sold 32.5 million shares at $72 in its IPO last Thursday evening. The transaction valued Lyft at $24.4 billion on a fully diluted basis. That was up 61% from its last private valuation of $15.1 billion in mid-2018.
Eager investors seeing visions of dot-com-like dollar signs piled in, and the stock soared to more than $88 at the open on Friday. But that was that.
Lyft ultimately gave back a chunk of those gains, closing at $78 and change. Then the stock plunged again on Monday, losing almost 12% and closing below its IPO price at $69.01.
Some post-IPO volatility is normal. But this certainly wasn’t.
It’s a sign that eager venture capitalists, Silicon Valley insiders and starry-eyed outside analysts may be way off-base about the true value of today’s money-losing tech darlings.
And Lyft certainly qualifies as a money loser. It racked up $911 million in red ink last year, or about $2.5 million per day!
I’m going to give myself a single here. Many of the risky IPOs from last year have faceplanted, just like Lyft has so far in 2019. But the broader Renaissance IPO ETF (IPO) is up sharply this year and flirting with last summer’s highs. If those gains fail to hold (as I suspect they will) and more future IPOs flop, this runner of a call will advance to second.
I also suggested that overhyped FAANG names would start lagging while safe money stocks would start leading. I’d rate that a solid double.
Only two (of 11) S&P 500 sector ETFs to hit new highs are the defensive: Utilities Select Sector SPDR Fund (XLU) and Real Estate Select Sector SPDR Fund (XLRE). They’re also up 20.1% and 20.2% respectively. That’s roughly double the rise in the benchmark NYSE FANG+ Index over the last 52 weeks.
Third, my warnings about the flattening/inverting yield curve – and its implications for the economy, fixed-income investments and financial stocks – has proven to be a home run.
I noted as far back as April 2018 that financial stocks were going to be major losers from important changes in the interest-rate markets. Then I said in December that you had to pay attention to how the curve was starting to invert, because that would get major attention on Wall Street before long.
Bonds just went ballistic to the upside, while bank stocks suffered their worst declines in several years. Overall, the diversified Financial Select Sector SPDR Fund (XLF) has lost around 5% in the past year. That means it has underperformed my favorite safe money sectors by a stunning 25 percentage points!
That said, I’ve been striking out (so far) on the direction of the stock market for a little while. My market atlas from January suggested the S&P 500 would likely top out in the mid-2,600s. But we’re trading about eight percentage points above that level now.
So, what about the rest of 2019?
I still expect this to be a challenging year. We’re very late in the economic and credit cycle, a time when market “accidents” and out-of-the-blue shocks typically become more common.
The yield curve is sending out cautionary signals about future growth, while corporate credit spreads remain elevated despite the rally in equities. Those are signs that bond investors aren’t anywhere near as sanguine as stock jockeys. Several volatility gauges also remain in higher ranges vs. those that prevailed before last spring. That’s another sign of lingering concern.
If anything changes, I’ll be sure to let you know. But I still advocate carrying a higher level of cash than you did from 2009 through 2018— keeping your stock investments titled toward “defensive” sectors and names and getting rid of stocks poorly rated by our objective, time-tested Weiss Ratings system.
