Stocks have lost roughly $5 trillion in value since their 2018 peak

by Sue Chang

Stocks had their worst start to a new year in nearly two decades, one of the most iconic companies in the world lowered its revenue outlook and high-profile strategists are already cutting their S&P 500 targets.

And it’s only day three into 2019.

Tobias Levkovich, chief U.S. equity strategist at Citi, earlier this week cut his 2019 S&P 500 forecast, blaming the selloff that has erased roughly $5 trillion in market capitalization since September.

“While one predictor still suggests that our prior 3,100 target is achievable, most of the other factors do not and we believe that a 2,850 S&P 500 target is more reasonable after the plunge in equity prices the last three months,” he wrote in a report.

He slashed his Dow Jones Industrial Average DJIA, +3.29% target to 26,000 from 28,100.

Stocks tumbled Thursday with the S&P 500 SPX, +3.43%  slumping over 2% after Apple Inc. AAPL, +4.27%  late Wednesday trimmed its sales forecast for the first time in more than 15 years on the back of slower demand in China.

The weakness coincides with Levkovich’s Panic/Euphoria Model—a proprietary sentiment gauge—dipping into panic territory.

“Our Panic/Euphoria Model twice hit euphoric readings in 2018, signaling caution to then complacent investors, but now is in panic territory indicating high probabilities of making money with average 18% upward moves looking out 12 months,” he said.

And for all the political drama swirling around President Donald Trump, the fact that it is the third year of a presidential cycle may work in investors’ favor, as the graph below illustrates.

S&P 500 performance by year in presidential cycle since 1900

Citi Research

“Moreover, at current inflation levels, an 18x P/E ratio is quite typical. Our normalized earnings yield gap analysis also calls for significant share price appreciation in the next 12 months with an 89% probability score. Nothing is guaranteed, but the data suggest that we should be buying into current weakness,” said Levkovich.

Brian Belski, chief investment strategist at BMO Capital Markets, also cut his 2019 S&P 500 forecast to 3,000 versus 3,150, in the wake of the market’s dismal 2018.

Still, big meltdowns tend to be followed by strong rebounds, he noted.

“Negative years do not automatically signal imminent doom for the market, especially when recession is not on the horizon,” said Belski.

The S&P 500, according to his data, has posted an average of 13.4% gain following negative years, significantly better than the 8.6% average return for the index since 1945.

But for now, positive returns appear to be elusive, with both the S&P 500 and the Dow Jones Industrial Average DJIA, +3.29%  skidding over 2% in the first two days of 2019.

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