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Where Is the Top to This Stock Market Run? Zacks JAN Strategy

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The following is an excerpt from Zacks Chief Strategist John Blank’s full Jan Market Strategy report To access the full PDF, click here.

Where's the top to this stock market run? That is at least a $1 trillion-dollar question.

To open this inaugural Zacks January Market Strategy report for 2020, I have two big thoughts on that:

First, this run is all about still more momentum in mega-cap stocks inside the S&P 500.

Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, shared some compelling facts:

 

  • Two stocks – Apple AAPL and Microsoft MSFT -- contributed the most to 2019’s total stock-market returns, and over the past decade of this bull market.
  • The top 10 contributors to the S&P 500 made up about 19.6% of the total stock market return over the decade. But 29.5% over the past year.

Second, this is uncharted water with respect to Fed repo buying. This will be going on until April 2020.

This is very short-end of the curve Fed liquidity provision. Frankly, given the relentless share index price action, it appears WORSE as a policy tool.

Compared to earlier long-end of the curve Fed “QE.”

The reason?

Repo buying appears to be more “Risk-On” in nature...

I. Introduction

It is commonplace to acknowledge the role of the U.S. Fed lifting stock markets the last three months. On January 6th, Reuters refreshed the U.S. stock market bull case for us.

The bull case for U.S. stocks in early 2020 fully depends on the Fed’s ongoing repo buying. Or some other facsimile of “QE” that arrives after it is wound down in mid-January, or April.

According to Reuters, the New York Fed began injecting billions of dollars of liquidity into the repo market in mid-September, when a confluence of events sent the cost of overnight loans as high as 10%, more than four times the Fed’s rate at the time.

A month later, the Fed moved to expand its balance sheet -- and boost the level of reserves -- by snapping up $60 billion a month in U.S. Treasury bills. The Fed will continue pumping tens of billions a day into the repo market through at least the end of January.

Its ability to exit from the repo market after that time will depend on how long it takes the central bank to make the balance sheet large enough so there are adequate reserves in the banking system -- and the repo operations are no longer needed.

“It seems implausible to me that the Fed will be able to stop their repo operations by the end of January,” said Mark Cabana, head of U.S. rates strategy at Bank of America Merrill Lynch.

Minutes from the Fed’s December policy meeting released on Friday showed its staffers expected repo operations to be “gradually” reduced after mid-January. However, staff members also said the central bank may need to continue offering some repo operations until at least April, when tax payments could reduce the level of reserves.

However, do not neglect two very overlooked U.S. stock market setups entering 2020 — this is the bear case.

First, earnings outlooks drawn up on the last quarter of 2019 are not improving:

 

  • On September 30th, 2019 the estimated S&P 500 earnings growth rate for Q4 2019 was +2.5%.
  • On January 3rd, 2020 all 11 S&P 500 sectors showed lower growth rates (compared to September 30th) due to downward revisions to EPS estimates.

Second, there is the S&P 500’s heady valuation.

The forward 12-month P/E ratio for the S&P 500 is 18.3. This core P/E valuation ratio is +9.5% above its 5-year average of 16.7 and +22.8% above its 10-year average of 14.9.

Given that unfortunate stock buyer’s technical and fundamental setup, this remains singular. U.S. market bears can still have a hard time of it -- for months.

Thank the Fed.

II. Zacks January Sector/Industry/Company Telescope

From December to January, four S&P 500 sectors got Zacks Industry Rank upgrades:Financials,Consumer Discretionary,Consumer Staples and Materials.

This speaks to a firming in U.S. growth fundamentals, led by a stronger consumer.

The growth stock Info Tech sector remains at the top of our recommendation list. But Semi Chips are stalled at a neutral rating. Consumer Electronics and Electronics more generally are the hot spots to look at.

(1) Info Tech remains Very Attractive, and is now best-in-class. I have Electronics, Computer-Office Equipment and Telco Equipment leading the way. Semis are neutral.

Top Zacks #2 (BUY): Methode Electronics MEI)

(2) Health Care stays Very Attractive in January. Once again, Drugs and Medical Products are very strong industries.

Top Zacks #2 (BUY): Roche Holding AG (RHHBY - Free Report)

(3) Communications Services stays Attractive. Telco Equipment is the best niche. Telco Services is OK.

Top Zacks #2 (BUY): Belden BDC)

(4) Financials rise to Attractive from Market Weight. I have Investment Banking & Brokering looking best. That must be due to strong stock markets. Insurance looks OK.

(5) Consumer Discretionary rises to Attractive from Unattractive. The best is clearly Consumer Electronics (grant you, this was a holiday shopping season). Publishing and Media are the next two industries to look solid. All three scream that computer screen-based entertainment grew.

(6) Utilities stay a Market Weight. Utilities-Gas Distribution looks best. Winter is on.

(7) Industrials stay at a Market Weight. I have Aerospace & Defense as Very Attractive. Business Products and Business Services looks OK too.

(8) Energy fell to Unattractive from a Market Weight. Realize that this Zacks Industry Ranking was done before the Soleimani story hit the wires, and took oil prices up.

(9) Consumer Staples rise to Unattractive from Very Unattractive. Only Consumer Products-Misc. Staples is a Market Weight. The rest of the groups look soft.

(10) Materials rise to Unattractive from Very Unattractive. Steel and Containers & Glass look best.

The rest of this inaugural 2020 Zacks Market Strategy report gives you all the details on our outlook for 2020. 

We have recast our stock pick fishing nets for your benefit.

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Roche Holding AG (RHHBY) - free report >>