In the beginning of the year, Wall Street’s top strategists post their market outlooks and S&P 500 year-end price targets. Many of these analysts take the conservative approach of estimating a 6%-12% increase because they don’t want to lose their jobs and that range is close to the average gain for the markets over the past 80 years. When the market is in a correction, I prefer to use a shorter-term approach and take it one quarter at a time.

My call for Q1 of 2019 is the market will see 7%-10% downside before it eventually bottoms and we start a sustained uptrend later this year. (Last month, I wrote about why the next 10% move in the stock market might be down and why the market is in a correction.)

I am basing my prediction for the first quarter of 2019 on the following headwinds facing the markets:

1) Hedge fund redemptions. Most hedge funds offer withdrawals on a quarterly or annual basis. For example, I read about 6 or 7 large hedge funds that were closing on September 30, 2018, and their forced liquidation helped accelerate the market decline last October. Unfortunately, 2018 was a very difficult year for active managers and I expect to hear more news of funds closing in early 2019. If this happens, this could put continued pressure on the markets as these funds will be forced to sell their holdings.

2) Interest Rates. The Federal Reserve is currently in an interest rate tightening cycle and you never want to fight the Fed. They are currently signaling two more rate hikes in 2019 and I don’t think the economy can handle this.

3) Earnings. While earnings are still strong, they are definitely slowing. Many large cap companies indicated this during their conference calls in Q4 of 2018. Earnings season will begin in earnest around the middle of January and I expect many CEOs to continue with their conservative guidance given the many uncertainties right now. The markets will continue to adjust over the next few months for this earnings slowdown.

4) China Trade War. The U.S. and China are expected to meet face-to-face the week of January 7. They will attempt to resolve this ongoing trade/tariff war but my feeling is this will drag out longer than most people expect. Besides being the two largest economies, there are big egos involved in these talks and I don’t think either side will give in until they see more pain affecting their respective job, manufacturing, and stock markets.

Other headwinds include the potential Brexit fallout at the end of March, the end of the European Central Bank bond buying program, and the escalated political tensions expected from the ongoing Government shutdown. The main problems, however, are listed above, and any relief in these areas will definitely be a positive for the markets in 2019. I would definitely change my outlook and expect a market bottom if we saw a relief in these main headwinds — but I think they will take time to resolve.