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Shake the Snow in Your Crystal Ball: Global Week Ahead

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In this Global Week Ahead, we see off the final trading days of 2019.

After that, we experience the first trading days of 2020. Those two trading days come after a Wednesday New Year holiday, of course.

Not surprisingly, we have a fair share of year-ahead prognostications to peruse.

As one part of that journalistic production line, I got this 2020 outlook from CNBC, and reordered it for equity traders—

(1) Watch for more of a “Santa Claus” rally in the coming week

On the near-term horizon, stocks have a good chance of rising into the final day of this year, based on history. The S&P 500 ended the past week with a +0.6% gain, at 3,240 and could keep rising in a late-December “Santa rally.”

According to Bespoke, in the 21 years since 1928 that the S&P 500 was up more than 20% for the year, it gained an average +1.3% in the final week of the year and was higher four out of five times.

So far, the S&P is having its best year since 2013. But if its gain rises above +29.6%, it will be the best year since 1997.

(2) As a backdrop, Wall Street expects the bull market to continue in 2020

As stocks close out 2019 with potentially the best gain in decades, strategists expect Wall Street’s bull market to continue in 2020 as long as it appears President Donald Trump will be re-elected.

Analysts see the possibility of a slight pullback early next year, after this year’s 29.2% surge so far in the S&P 500.

But the market is still expected to go higher, with analysts targeting an average 3,320 for the S&P by the end of 2020, according to a CNBC survey.

Stovall said the strong 2019 performance of both stocks and bonds bodes well for next year, when looking at history going back to 1976. Since then, the S&P 500 has averaged a +12.9% gain.

The Barclays Aggregate bond index, representing a diversified bond portfolio, was up +8.5% for 2019, above its average 7.5% return, he said.

Following years in which both stocks and bonds make above-average returns, the stock market has done even better.

  • The S&P is up +14% in the next year and rises 82% of the time
  • Bonds averaged gains of +8% in the next year and rose 10 of 11 times. Bonds increase in value when yields fall

(3) How to factor in a Presidential election?

“Since World War II, the average gain in the fourth year of a presidential term is +6.3%, and it’s up 78% of the time,” said Sam Stovall, chief investment strategist at CFRA.

The price gain in the S&P is even better, with an average +6.6% gain if it is a Republican seeking re-election, and the market has been higher each of the six instances of this since World War II.

(4) Big long-term risks in 2020: a rise in consumer inflation, high P/E ratios

Stovall said beyond the election, another risk for next year could come from the Fed, if inflation readings begins to rise.

“Another risk is if we see the economy start to show signs of recovery too swiftly and start to see inflation numbers creep higher, investors will start to worry that not only is the Fed done cutting but they may have to think about raising rates again,” said Stovall.

Stovall said the other challenge for stocks will be to see if fundamentals can catch up with now much higher price-to-earnings ratios.

“We’re already at 19 times forward earnings. My feeling is we either start to see a dramatic acceleration of earnings growth expectations or we have to digest these gains,” he said. “Maybe it won’t happen until the beginning of January, but I think we’re getting ahead of ourselves.”

Analysts say there could also be other unanticipated events, like a new round of trade anxiety, but the belief for the most part is the White House will do its best to keep the economy on a positive track.

There is a concern that investors could miss out if they are too worried about the election, which already has strategists assessing how different sectors could be hit by Democratic candidates.

“The headlines and the anxiety that can typically come around an election have been pulled forward, and my fear is it will lead to inaction,” said Cayman Wills, global head of equities at J.P. Morgan Private Bank. Wills said in a recent interview that she is fairly optimistic for next year.

“We’ve been focusing more on longer-term themes that can get clients invested and engaged that go beyond the election cycle, and you don’t lose out on potential returns,” she said.

Top Zacks #1 Rank Stocks

Respecting a big long-term risk in 2020 (overvaluation) is a sound idea.

Next, I show you two overvalued semi chip stock examples. And one mining stock, to consider rotating any freed-up capital.

(A) Applied Materials (AMAT - Free Report) : This is a $61 a share semi wafer fabrication stock. The chips are hot, even though their earnings prospects are still sagging.

I see a Zacks Value score of C and a Zacks Growth score of F.

(B) Qorvo (QRVO - Free Report) : This is a $13.5B market cap semi chip radio frequency stock. It has a frothy $117 price tag.

I see a Zacks Value score of C and a Zacks Growth score of D.

(C) Fortesque Metals Group (FSUGY - Free Report) : This is an Australia-based mining group. Share are cheap at $15 each. It may be time to rotate into Materials stocks like this.

I see a Zacks Value score of B, a Zacks Growth score of C and a Zacks Momentum score of A.

Tech stocks — led by the chip stocks — were hot in 2019. As we close the year, could it soon be time to rotate elsewhere?

Key Global Macro

The Global Week Ahead gets broken up by the Jan. 1st stock market holiday on Wednesday.

However, Wednesday also gives up the Caixin China manufacturing PMI.

Thursday gives us a number of European manufacturing PMIs.

Then, there are a few key U.S, economic reports to monitor, with Friday’s calendar the most important.

  • The important ISM manufacturing data is reported that morning, as are monthly U.S. car sales and U.S. construction spending.
  • The Fed releases the minutes from its last meeting later that afternoon.

On Monday, I see the Chicago PMI (48.3 is consensus) and pending U.S. home sales (+1.4% y/y is consensus) on the docket.

On Tuesday, we get an update on S&P/Case-Shiller home prices, with a +2.1% y/y rise as the consensus. We also get a comparable FHFA home price index from the U.S. government.

A reading from the U.S. Consumer confidence index comes out. Consensus has 128.0, after a strong 125.5 print in the prior reading.

On Wednesday, it is New Year’s Day. Stock markets are closed.

But the Caixin manufacturing PMI for mainland China comes out. Look for 51.8, in line with the prior print.

On Thursday, we get U.S. weekly initial claims for unemployment. These have been holding up well during this holiday season.

In Europe, any traders at work get to see the manufacturing PMIs for Italy (47.2 consensus), France (50.3 expected), Germany (43.4 expected) and the U.K. (47.6 expected).

On Friday, we get the latest U.S. ISM Manufacturing Purchasing Manager Index (PMI). Consensus sees 49.0, rising from a 48.1 prior print.

U.S. monthly vehicle sales and construction spending figures also come out.

At 2:00 p.m. EST, the most recent FOMC minutes will be released.

Enjoy more of the wintry holiday season this week. We surely see low stock trading volumes most days.

I wish a Happy New Year to all!

Warm Regards,
John Blank

 

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