Why One Analyst Is Optimistic about 2020

Why One Analyst Is Optimistic about 2020

Certain market forces are in favor of stocks rising further in 2020, making an analyst quite optimistic heading into 2020. 

Experts believe emotions should not get in the way of trading decisions, but you can’t get away from optimism or pessimism since these often determine the decisions you make. With direct market access trading on offer online, you just need to get started on investing in stocks after listening to some opinions of analysts. And there is some optimism in the air.  

According to an expert analyst quoted by Mark Kolakowski in this Investopedia article, stocks that soared 25.5% in 2019 could continue on a bull run and rise in 2020. This view is based on a prediction by CFRA Research strategist Sam Stovall that these stocks could grow by a further 9% from now until the end of 2020. Stovall bases this prediction on five market forces. This should be getting you excited, since the prediction, if it turns out right, would mean a massive gain of 46% from the Dec 2018 low! That was when investors were worrying about a potential recession. It’s a significant turnaround according to this analyst!

The Five Forces Stovall Relies On

So what are these five forces Stovall points to?

• The performance spread between the best and the worst of the S&P 1500 sectors has been lower than historical averages
• There is the likelihood of the Federal Reserve continuing its present monetary easing program
• The 8.2% consensus EPS growth in 2020 for S&P 500
• There is the possibility of a US – China trade deal reaching the Phase One stage
• Next year is a presidential election year and also the period after the points when the S&P 500 dividend yield exceeds the 10-Year US Treasury Note yield – such years are usually favorable for stocks

Explaining the Factors

Narrow Performance Spread Best and Worst Sectors in the S&P 1500

Looking at the year-to-date comparison through November 30, energy is the only sector in the S&P 1500 that is down. As we mentioned above, the spread in performance between the information technology sector (which is the best performing and up by 41.4%) and the energy sector (the worst performing and down by 0.5%) is quite narrow, narrower than it usually is. Since 1990, the spreads of the year-ahead gain after the below-average calendar year averaged over 13%. A price rise was recorded “80% of the time”, according to Stovall’s observation.  

Fed Continuing with Monetary Easing

Stovall also observes that since World War II the Fed has carried out 16 prior rate cutting cycles. The 18 months after the first cutting saw the S&P 500 advancing for 75% of the period, gaining 18.6% on an average.

What the Presidential Election Year Could Bring

The presidential election years have historically seen the S&P 500 advancing 78%, at least from World War II. It has recorded a 6.8% average advance. And there are more election related figures. The 6 years in which a Republican president sought re-election saw the S&P 500 up always, gaining an average of 6.6%.

Looking at data from 1953, whenever you had the S&P 500 dividend yield greater than the 10-Year T-Note yield, you also find the S&P 500 rising 84% in the following 12 months, with an 18% average gain. On December 9, the T-Note opened trading and yielded 1.82%. The S&P 500 had a 1.85% yield.

 The Expected Trade Truce

As far as earnings projections are concerned, Stovall quotes a Wall Street adage which says that “prices lead fundamentals”. This hinges on the prospects for a trade truce, which Stovall reckons is highly likely. Till any such deal actually happens, EPS estimates could fall short of the potential according to this analyst.

These insights should help you to plan your moves. With online stock trading offered by efficient broker dealers, trading can be done from the comfort of your home.   

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