Stock market analysts are bullish on 2019 just because back-to-back annual declines are so rare

Key Points
  • The S&P 500 fell 6.2 percent in 2018 to notch its biggest one-year decline since the financial crisis.
  • Instinet's Frank Cappelleri points out that, while annual declines for the S&P 500 are not that rare, "only four periods have seen consecutive yearly losses over the last 92 years."
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2018 was terrible for stocks, but years like that are usually followed by a strong bounce the next year, stock market technical analysts are pointing out.

The fell 6.2 percent in 2018 to notch its biggest one-year decline since the financial crisis. In 2008, the broad market index plunged 38 percent.

Last year's decline came as investors grappled with tighter monetary policy from the Federal Reserve, fear of a possible economic slowdown and worries over ongoing U.S.-China trade negotiations. It was also a year characterized by volatility. The S&P 500 reached record levels in 2018, but also came within a whisker of falling into bear-market territory on a closing basis.

Frank Cappelleri, executive director at Instinet, said in a note Wednesday that annual declines are not that rare. In fact, they have happened about a third of the time since 1927. "However, only four periods have seen consecutive yearly losses over the last 92 years."

The only four times in which the S&P 500 has seen consecutive annual declines were in the following time periods, Cappelleri points out:

  • 1929-1932
  • 1939-1941
  • 1973-1974
  • 2000-2003

"For the very long-term investors, this is good to remember," Cappelleri said. "Over time, the risk-reward ratio [pays off]. But as 2018 showed us, the risk portion does, in fact, exist and can hurt — badly."

Craig Johnson, chief market technician at Piper Jaffray, also said the last two annual declines that resembled last year's 6.2 percent drop were followed up with sharp gains the next year.

In 1954, the S&P 500 surged 45 percent after falling 6.6 percent in 1953, he said. The broad index also jumped 26.3 percent in 1991 after sliding 6.56 percent in the previous year.

"The silver lining to last year's disappointing equity market is that negative returns do not historically carry over into the succeeding year," Johnson said in a note Wednesday. He also said the "technical setup for the broader market has improved over the last week. The S&P 500 has bounced off support near 2,350."

To be sure, several of the concerns that plagued investors in 2018 have carried over into the new year. China and the U.S. are still trying to make progress on the trade front. Forward-looking indicators such as the Purchasing Managers' Index from different parts of the world point to slower economic activity moving forward. There are also concerns that corporate earnings growth may slow down after surging in 2018.

"Although there are manifold risks in front of us, we have recently been arguing for an investment stance that is long risk," said Michael Darda, chief economist and market strategist at MKM Partners.

"Although we do not expect impressive equity returns from the highs of the year, we do expect strong gains from the 2018 lows," Darda added. "History would suggest 22% gains (or 27% assuming it's not 1930 or 2008) from the 2018 lows over the course of the next year."

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