Traders work on the floor of the New York Stock Exchange.
By the close of trading next Thursday, the bull market will be ready to run into 2021, but likely at a slower pace.
January is the month that Wall Street tradition says sets the tone for the year – “then January goes, then year goes,” as they say. This January could be challenging, as the scattered pandemic slowed the economy and the run-off election of the important Georgia Senate on 5 January.
On January 20, Joseph Biden will be sworn in as president.
“It’s a market that is at the end of the year auto pilot,” said Sam Stovall, chief investment strategist at CFRA. In three out of every four years, the market sees a Santa Rally at the end of the year, but Stovall is also waiting to see trading the first five days of January for signs of how the market could trade in 2021.
If the market is higher in the first five days, history shows that the S&P 500 has been up 82% of the time for the whole year with an average gain of 12.5%, he notes.
“There are things we can worry about in January. If they were real concerns, the market would already be reacting or already treading water,” Stovall said. “What scares me is that the market is creating itself. It’s a correction in search of a catalyst, and we do not know what the catalyst is yet.”
Some strategists expect a retreat early in the year, but consensus is that the market will end 2021 higher. The average expectation for the S&P 500 at the end of 2021 is 4,056 according to a CNBC study of strategists.
Stovall said the market has become expensive and there are signs of foam. The SP 500 companies’ 12-month price-to-earnings ratio is 41% premium to the average multiple of 16.7, which goes back to the year 2000.
“I do not feel strongly that the first few days of January should set the market direction for this year’s balance sheet,” said Michael Arone, chief investment strategist at State Street Global Advisors. “If in fact [stocks] do rally, it’s more a sign of strength. But if they suffer from a hiccup, I would not throw in the towel. “
The result of the Georgia races is a wild card for stocks, and it can trigger a market reaction regardless of the result. Should there be a surprise and the Democrats win both seats, the Senate will be divided equally between Republicans and Democrats. It would leave the elected Vice President Kamala Harris to cast the vote.
Some strategists say the market could be sold out if Democrats win, as investors fear the party will have the right to vote to implement tax increases, which Biden favors. On the other hand, a GOP victory can trigger an emergency rally.
But Stovall said the market could fight for a democratic victory if investors considered the prospect of a larger infrastructure and stimulus package favored by Democrats.
Arone said that uncertainty about the current fiscal stimulus package of 900 billion. Dollars approved by Congress last week could become a concern if President Donald Trump decides to veto or sign the bill.
The president criticized the package, saying individuals should receive more than the $ 600 that would go to many adults and children as part of the relief.
The bill stretches helping millions of unemployed Americans, and these benefits expire on December 31, unless signed.
“We are against deadlines, as opposed to just being a political thing,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “There are actual deadlines for benefits expiring. Because of deadlines, the market assumes it will be passed.”
But the concern hangs over the market until it is resolved.
In the coming four-day holiday week, trading is expected to be quiet. There are few financial reports; jobless demands Thursday will be followed closely. In the following week, the job report in December is expected to show a weaker labor market, and some estimate that only approx. 100,000 jobs or less.
That S&P 500 enters the last week of the year with a gain of 15% in 2020, but from March low, the index has risen by about 65%. The bull market turned nine months old last week.
According to CFRA’s Stovall, this nine-month gain is more than double the average nine-month gain of 32.2% for all bull markets since World War II. In the remaining course of the bull markets, their average compound growth was only 20.3%, indicating a slowdown in the rate of gain.
“After these typical jackrabbit starts, bull market raise rates typically slowed down, sending less compound annual rates into the rest of their bull market races,” Stovall noted. Based on previous bull markets, he said the returns could be lowered in the rest of this bull to about half of their current gain.
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