Another Big Rally For Stocks
2019 is finishing strong. Stocks are beginning to look frothy according to some metrics. That’s going to happen when the S&P 500 is on a 4 day winning streak and is up 27.31% year to date. You can say this is a Santa Clause rally. But really it’s a continuation of the momentum we’ve seen all year. It’s tough to call for a correction in the last 2 weeks of the year because of calendar effects. So I’ll just say stocks are headed for a below average year.
Stocks usually don’t do great in election years although it might not be a big issue if Biden is the nominee. If Sanders is the pick, there will probably be excess volatility. That might be the biggest potential black swan in 2020. I’ll update you on the Democratic primary later in this article.
Overbought Or Not?
Stocks are overbought, but not as overbought as they were in November. Valuations have been stretched this year as 92% of the gains in the S&P 500 have been from multiple expansion. That’s above the bull market average of 32%. Stocks can’t rise without earnings in 2020. While earnings likely will rise, there won’t be that much of an increase.
FactSet shows margins are expected to fall again in 2020 as revenue growth is expected to be 9.7%. And EPS growth is expected to be 5.5%. Stocks might actually fall in 2020 with even a modest multiple contraction. Why would they contract? Because the acceleration has already been priced in.
Looking at the near term, the CNN fear and greed index shows stocks are very overbought as the index increased 7 points to 82 which is extreme greed. It never exited greed after its big spike in November. VIX fell 0.49 on Monday as it is only at 12.14. That is very low.
On the other hand, the chart below shows stocks aren’t nearly as overbought as they were in early November. About 26% of S&P 500 stocks have a 14 day RSI above 70. That will quickly change if stocks increase this week, but for now it’s not an issue.
Democratic Primary Update: Sanders Does Well
Top story in the Democratic primary is bad for the party. All of the candidates stated they wouldn’t attend the debate this Thursday if a deal isn’t made with the food workers’ union. Unfortunately, it seems like there won’t be a new debate set up if this one doesn’t go on because there aren’t venues available near the holidays. If a deal doesn’t get done, there won’t be a debate.
Dems might add another debate in 2020 to make up for it. Personally, I think there will be a deal because the stakes are high. A DNC spokeswoman stated, “Tom Perez (DNC National Committee Chairman) spent the entire weekend on the phone with various stakeholders, including Sodexo, LMU and Unite Here. As a former labor secretary who handled several labor disputes, he understands the importance of getting the parties back to the table, and expects that to happen promptly.”
Most of the polls that came out on Monday and early Tuesday were good for Sanders. Best was the California state poll which showed him leading by 3 points over Warren. Average of the recent polls has Biden up by 0.2%. In 3 of the 4 national polls Sanders was in 2nd place. Biden was up 8%, 2%, and 9% over Sanders.
A poll where Sanders was in 3rd was amazing for Biden as he was up 13% on Warren. Average of the recent polls has Biden up by 8.3 points on Sanders who is above Warren by 2.6 points. Buttigieg has lost momentum and Bloomberg has gained some as he averages 5.3%.
Finally, PredictIt has Biden with a 30% chance of winning and Sanders with a 21% chance. The stock market is completely ignoring Sanders’ chances of winning. If he inches up a bit further in the polls, stocks will likely react negatively.
Recap Of Monday’s Session
S&P 500 and Nasdaq hit another record high as they increased 0.71% and 0.91%. Russell 2000 was up 0.73% which is its highest level since September 2018. It’s down 5.2% from its record. Fed funds futures shows there is a 53.4% chance of a cut next year. It would help small caps if the cut was taken off the table.
Every single sector was up on Monday except the industrials which fell 3 basis points. It could have been hurt by the slight weakness in the manufacturing flash PMI. Best 2 sectors were energy and the utilities which increased 1.42% and 1.29%. You usually don’t see the utilities rallying on a ‘risk on’ day for stocks.
Apple Has Gotten Expensive
Apple isn't necessarily a sell, but it’s not a buy as it has gotten expensive this year. It’s amazing for a mega cap stock to be up 77.22% year to date; it has led the indexes higher. As you can see from the chart below, Apple’s PE multiple has almost doubled from its December bottom.
This is its highest PE multiple since April 2010. It’s hard to imagine Apple having the product roadmap that it did 10 years ago. Are services really that valuable? It’s not just up because of the buyback because that lowers the PE multiple.
The Best Decade In 60 Years
This decade followed a dreadful one which experienced two 50% declines in the stock market. That decade experienced the end of the dot com bubble and the global financial crisis. 2010s has been much better as there haven’t been any recessions.
This decade should teach us that 50% declines are very rare. Many don’t expect one in the next decade. Although, obviously we can’t see 10 years in the future. As you can see from the chart below, the Sharpe ratio for the 2000s was -0.23. It was 1.01 in the 2010s, making this the best decade since the 1950s.
