The following is an excerpt from Zacks Chief Strategist John Blank’s full Dec Market Strategy report To access the full PDF, click here
Why are U.S. large cap stocks trading at record highs?
Fresh “QE” Fed bond buying helps fight the rising geopolitical headwinds.
The ECB in Europe plays a similar “QE” game. The Bank of Japan is the next “QE” player. Also factor in the People’s Bank of China, the Swiss National Bank, and the Bank of England.
This bond buying activity put $22T dollars on these central bank balance sheets
Consult the chart below:
In short, fresh daily Fed and ECB (et al) liquidity pulse have lifted stocks to new valuation heights.
So, the S&P500 trades at a 17.6 forward P/E ratio now. The 10-year average is 14.9. That’s an 18% returns lift. Stocks are up +22.8% this year. Take away the 18%. You get 4.8% returns. That’s close to the S&P500 revenue growth we are witnessing.
These political headwinds include (front and center) the U.S/China trade war. But it should also now include a brewing U.S./Eurozone trade war, the passage of a new U.S./Mexico/Canada free trade act, U.S. tariffs on Brazil steel, a Senate impeachment trial in Q1-2020, and daily media retaliation from an unpredictable U.S. President.
I put this material in the Global Outlook section, because the world suffers even more than the U.S. from slow GDP growth, or recession scares. Then consider this. Fed rate policy is then boxed in by super low and even negative interest rates all over the world.
Where does this go in 2020?
We can’t argue much with the prognosis on the CME’s FedWatch tool. So, we will restate it as Fed rate cut 2020 consensus.
By June of 2020, the Fed Funds rate 50% of being the same as it is in early December 2019.
There is a 36.5% chance of another 25 basis point cut by then.
And a 10% chance of two cuts of 25 basis points each, not necessarily at the same FOMC meeting.
The second half of 2020 is murkier Fed water. Factor in the Presidential election.
If we look at November 2020 futures, traders have posted a 31% chance of no new Fed cuts,
- a 39% chance of one 25 basis point cut,
- a 21% chance of two 25 basis point cuts, and
- a 7% of three cuts.
In 2019, CIBC claims the global economy received 90 interest rate cuts across 45 global central banks. That represented the largest cumulative easing since the 2008 financial crisis. Look for more of the same in 2020.
Zacks December Sector/Industry/Company Telescope
In December, I see noted downgrades for both Consumer Staples and Consumer Discretionary. This is the holiday shopping season. That is not welcome news.
Trade wars are raising prices on manufactured goods. Uncertainty and stress and buying fatigue are words I could also apply. The state of the consumer bears further discussion.
Two stellar S&P500 sectors are Health Care and Info Tech. Their growth sectors are back to their usual strong spots. Communication Services also looked good this month.
Materials are at the very back of the sector pack. Global growth is poor.
(1) Health Care leads and is Very Attractive in December. Drugs and Medical Products are very strong industries.
Top Zacks #1 Rank STRONG BUY Stock— LHC Group, Inc. (LHCG - Free Report) )
Headquartered in Lafayette, LA, LHC Group serves as a post-acute care partner for hospitals, physicians and families in the United States. From home health and hospice care to long-term acute care and community-based services, LHC Group delivers high-quality, cost-effective care that helps patients manage their health at home.
The company operates through five segments — home health, hospice, home and community-based, facility-based and healthcare innovation.
(2) Info Tech is Very Attractive. I have Misc. Tech leading the way. Electronics, Telco Equipment and Semis all look strong.
Top Zacks #1 Rank STRONG BUY Stock— ManTech International Corp. (MANT - Free Report)
ManTech International is a leading provider of innovative technologies and solutions for mission-critical national security programs for the Intelligence Community; the Departments of Defense, State, Homeland Security, and Justice; the Space Community; and other U.S. federal government customers.
(3) Communications Services look Attractive. The Telco Equipment and Telco Services industries are marking solid Zacks Industry Ranks.
Top Zacks #1 Rank STRONG BUY Stock—Mobile TeleSystems PJSC (MBT - Free Report)
These ADR shares are tied to a tele-systems company headquartered in Moscow, Russia. It is on a mission is to build an integrated mobile communications world, which will bring people together, enrich their lives and open up new horizons, both at work and at home.
(4) Financials are a Market Weight. I have Finance looking best. Real Estate, Investment Funds, and Insurance look OK.
(5) Utilities are a Market Weight. Utilities-Electric Power looks best, as winter is arriving
(6) Energy is a Market Weight. Oil-Miscellaneous and Pipelines look the best.
(7) Industrials are a Market Weight. I have Business Products as Very Attractive. Construction-Building Services looks good too.
(8) Consumer Discretionary is now Unattractive. The best is Publishing. Non-food Retail, Apparel, Other Cons. Discretionary and Home Furnishings are Market Weight.
(9) Consumer Staples is now Very Unattractive. Only Tobacco is a Market Weight. The rest of the industries look poor.
(10) Materials are Very Unattractive. None look good, but Metals Non-Ferrous is best.
That’s is for me.
Delve into the remaining details by clicking the link to the full PDF report from Zacks.
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