Investors should brace themselves for further stock market declines in 2019, Bank of America Merrill Lynch warns. In a note to clients, as quoted by Business Insider, Michael Hartnett, the firm's chief investment strategist, said: "We don't think Nov. '18 = Big Low, we still think that's a few months away."

A prior report from BofAML stated: "The 'Baby Bear' market on Wall St that began in 2018'Q1 is not yet over. Once rate expectations peak and EPS expectations trough, we believe asset prices will find their low." This comment appeared in BofAML's Thundering Word report, in a recent issue entitled "2019--the year ahead: The Big Low." Their chief reasons for bearishness right now are summarized in the table below.

5 Reasons Stocks Will Go Lower: Bank of America Merrill Lynch
Positioning Institutional investors turning "extremely bearish"
Profits "Global profits to decline sharply"
Policy U.S.-China trade war, fading U.S. fiscal stimulus, peaking Fed tightening
GDP "Notable deceleration in global growth as 2019 progresses"
Inflation "US inflation to come in just above the Fed's 2% target"
Sources: Bank of America Merrill Lynch, Business Insider

Significance For Investors

While the U.S. and China have reached a trade agreement that spurred optimism among some investors, Hartnett is among the skeptical observers who believe that "the can has simply been been kicked down the road," as Business Insider puts it. Specifically, the deal reached between U.S. President Donald Trump and President Xi Jinping of China simply puts a 90-day moratorium on the imposition of new tariffs.

Meanwhile, decelerating global economic growth has induced what Hartnett calls "policy panic" in the People's Bank of China (PBOC) and the European Central Bank (ECB). Both central banks are feeling compelled to take active measures to support their economies, he notes.

More Downside Ahead
"The 'Baby Bear' market on Wall St that began in 2018'Q1 is not yet over." -- Bank of America Merrill Lynch
Source: Bank of America Merrill Lynch

Hartnett notes that global corporate earnings estimates are still robust for 2019, but believes that this is overly-optimistic. He also observes that, despite the looming prospect of an inverted yield curve, which would be the first recurrence since the 2008 financial crisis, few forecasters are predicting a U.S. recession before 2020. When the yield curve inverts, with short term rates higher than long term rates, that normally is a reliable signal of an upcoming economic contraction.

Looking Ahead

Given all the negatives that he sees, Hartnett is recommending that investors use any rallies in stock prices as opportunities to sell. Meanwhile, BofAML's earlier report says that they are bearish on stocks, bonds and the U.S. dollar, but bullish on cash and commodities. Cash is among the best-performing assets of 2018, and investors are building up their balances, as detailed in another Investopedia article.

However, the report continues, "We expect to turn tactically bullish once peak rate & trough EPS expectations signal 'The Big Low.'" Regarding interest rates, they currently expect 4 rate hikes by the Fed in 2019, but add: "A rally in REITs, homebuilders & semiconductor stocks would confirm Fed rate expectations peaking."