Christmas May Have Come Early For Stocks, So Don't Expect a Santa Claus Rally

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We may not get that Santa Claus rally after all. 

For clarity, a Santa Claus rally occurs around Christmas time and results from some added cash coming into people's accounts. "A lot of it has to do with year-end bonuses; people have extra cash, pension plans need to be done by the end of the year," Lindsey Bell, chief investment strategist at Ally Invest, told TheStreet. 

But there's one roadblock to such a rally in 2019. 

The S&P 500 has had a "really outsized performance for the month of November, so I think we've pulled forward a little bit of the six-month strength," Bell said, referring to the market's usually strong period from November through April. Indeed, the S&P 500 is up 3.6% for November, better than the 2.5% average gain for the month.

Since Oct. 8 the market is up a bit more than 8%. General optimism that President Donald Trump is interested in a trade agreement with China, a belief that a Federal Reserve currently in "wait-and-see" mode will remain accommodative if need be, and better-than-expected third-quarter GDP have powered stocks in the time frame.

GDP growth was initially said to be 1.9% in Q3, but was revised Wednesday to 2.1%, beating expectations of 1.7%. Year-to-date, the index is up 25%, after an ugly December 2018 stock selloff. 

So what's left for stocks in 2019? Because trade talks "remain unresolved, you'll continue to see volatility in the market through the start of the year," Bell says. "We're not looking for a blockbuster performance." 

This doesn't mean stocks won't do well in 2020. Strategists see a roughly 5% gain to the S&P 500 in 2020, which lags compared with the historical annual average of 8% to 10% (depending on time period).

But the expected gain is still something considering the slate of macro risks. The U.S. economy is decelerating; it has expanded for more than 10 years, an outsized period for an expansion in the country.

The trade war is damaging business confidence, which could ultimately threaten the currently strong consumer. Lastly, the safety net of low interest rates is fading, as many say the impact of low rates can stimulate growth for only so long. 

Stifel's head of institutional equity strategy, Barry Bannister, does say that the current real federal funds rate of zero (federal funds rate of 1.6% minus inflation of 1.6%) should translate into a forward earnings multiple on the S&P 500 of 19.25. The current multiple is just under 18, so this would move stocks higher.

Others say the current multiple leaves the market fairly valued and any upside will come from higher earnings estimates. Current 2019 earnings estimates are for roughly 8%, according to FactSet.

Bell says new-year estimates can often be optimistic, leaving them vulnerable to falling about five percentage points. Still, upside of 5% to the S&P 500 "sounds fair to me," she said.