Wall Street builds case for year-end stock rally

Adam Shell, USA TODAY
October 16, 2015

After the stock market’s first 10% drop in four years in late summer and fall rebound that followed, a growing number of Wall Street pros are making the case for a year-end rally.

“The planks for a year-end rally may be falling into place,” says John Stoltzfus, chief investment strategist at Oppenheimer, adding that he thinks there’s a chance the market can make new highs by the end of 2015.

Back in late August when the Standard & Poor’s 500 was down more than 12% from its May peak and the Dow Jones industrial was staring at a nearly 15% correction, there was talk of a looming bear market -- not a year-end rally.

But the stock market’s ability to stay above its scary summer lows and subsequent 8.4% rally off its 2015 trough now has investors viewing the outlook for stocks in a more positive light. Thursday's big rally, which saw the Dow Jones industrial average soar 217 points and the S&P 500 jump 1.5% to 2023.86, leaving it just 5% off its May peak and down 1.7% for the year, gave credence to the bullish storyline.

The S&P 500 rally continued Friday. In early trading the broad U.S. stock gauge was 0.2% higher.

“What makes (the year-end rally) happen,” says Stoltzfus, is the belief that “2016 will be a less harsh year.”

Adding to the bullishness: Many of the headwinds that sparked the U.S. stock market’s biggest swoon since 2011 are no longer weighing down the market like they did earlier this year, says Don Luskin, chief investment officer at TrendMacro.

“The big August correction was caused by the strong dollar, collapsing oil prices, a scary slowdown in China, and a Fed that seemed determined to hike rates despite it all,” says Luskin. “Every risk factor driving the big correction has reversed for the better now.”

Wall Street now doesn’t see an interest rate hike from the Federal Reserve until March 2016, as inflation has yet to show any signs of overheating at a time when recent economic data has come in a tad weak.

Also giving investors courage to buy stocks is the fact that the triggers that normally cause bear markets, or market declines of 20% or more, are not visible.

“When you look at things that cause bear markets, things like overvaluation or signs of recession, we don’t see any of that,” says Saira Malik, head of global portfolio management at TIAA-CREF. Nor does Malik see China suffering a severe economic slowdown.

Stocks are also entering a seasonally strong time of the year. The market could also benefit from a high level of investor pessimism and very low expectations for third-quarter earnings, which could make it easier for companies to top forecasts.

Thorne Perkin, president of Papamarkou Wellner Asset Management, is also bullish, and ticks off more reasons why stocks will grind higher through year-end. The market, he argues, has “already had a significant correction,” with the average stock suffering declines of 15% to 20%. The market’s nosedive, he adds, has brought price-to-earnings ratios back in line with historical averages. “The S&P 500’s long-term P-E is around 15, and the market now is around 16 times, which is perfectly fine,” Perkin says. Finally, stocks, many of which pay an annual dividend in excess of 3%, still remain the best alternative, given cash is paying around 0% interest and the 10-year Treasury note is yielding around 2%, Perkin says.

What would spook the market?

Malik says stocks would run into serious trouble if China’s economy gets “much, much worse” and if there were signs of “runaway inflation” in the U.S. or indications the Federal Reserve was set to hike rates sooner and more rapidly than expected.

Pubdate: 
Friday, October 16, 2015