Wall Street builds case for year-end stock rally
Reasons behind the market’s correction seem to have ‘reversed’
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, who thinks the market could 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.
But the stock market’s ability to stay above its scary summer lows and subsequent 8.9% rally off its 2015 trough now has investors viewing the outlook for the stock market in a more positive light.
“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, 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.”
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 such as overvaluation and signs of recession that normally cause bear markets, or market declines of 20% or more, are not visible, says Saira Malik, head of global portfolio management at TIAA-CREF.
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, 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.