Dow, S&P can climb the market’s wall of concern, the story goes


The Dow Jones Industrial Average fell on Monday when it opened after breaking another new high last week. Post World War II market history suggests that any decline early in trading this week could be followed by further gains before year end.

There are many reasons for investors to worry about the next big share price after a big November that saw the S&P 500 index gain 12%. Covid-19 cases are on the rise, and a senior White House virus advisor said this winter’s weekend “will be the worst event this country will face”. Coronavirus lockdowns are on the rise, and last Friday’s monthly job report was a major disappointment, reminding the nation of the severity of the economic fallout that erupted during the pandemic last spring.

For Sam Stovall, chief investment strategist at CFRA Research, that Friday job number was the perfect example of this market “climbing a wall of worry” time and time again.

“I kept connecting my iPad to CNBC and saying, ‘OK, update’ because I was sure the future was going to fall as the number of new hires was 200,000 lower than expected. But no. … That says Wall Street doesn’t pay much attention to the present at all, but focuses on the future, “said Stovall.

Traders work on the trading floor of the New York Stock Exchange.


This view of the future is supported by the history of the bullish US stock market years.

From the start of the year to the end of November, the S&P 500 rose 12.1%, according to CFRA data, despite a setback in the bear market of 34% at the beginning of the year. There have been 36 years that the S&P 500 has seen a 10% increase or more in 11 months since World War II. In December of those years, the price of the S&P 500 rose 75% of the time, with an average increase of 1.8%. This gain was above the average for all December since 1945.

This also applies to the Dow trading pattern. Whenever the S&P 500 was up 10% year over year through November, the DJIA rose an average of 1.8% in December and rose 78% of the time.

The Dow was up 3.9% through November and history shows that this is a bullish indicator for the final month of the year as well. In the 43 trading scenarios since World War II, where the Dow rose 4% through November, it rose an average of 1.9% in the last month of the year and rose 78% of the time, according to the CFRA.

“It shows that the chances are pretty good that we will continue to see positive returns in December,” said Stovall.

Recent market history suggests that investors are also keeping an eye on small-cap stocks. Since 1979, there have been 23 times the Russell 2000 Index, up to November 30th, has grown by more than 9% year-to-date, as it was this year. The following December, the Russell 2000 was 2.7% and 87% higher, compared to an average of 2.2% and a 76% increase for all December since 1979.

The economic stimulus is seen as even more optimistic for small capitalization stocks that are closely related to the US economy compared to large capitalization stocks with an overall more global business mix.

Stimulus-free optimism could lead to further market gains

But there are reservations in the data too. December is typically one of the strongest months of the year for stocks, regardless of the level of earnings since the start of the year – called the Santa Rally – but the Dow and S&P returns in these specific trading scenarios were above December averages.

According to CFRA data, huge November histories have tended to lead to December gains. That said, if the uptrend continues, overall earnings levels this year could be less significant in the last month of trading, and by early December trading stocks were up around 1%.

“We need to know that a lot of fuel has already been used and the upward path, the angle of ascent, is being reduced,” said Stovall.

However, it’s not just the vaccination promise that could move herds beyond short-term concerns.

Also bullish is the recent discussion in Washington DC that an economic stimulus package, even a smaller one, is getting closer. As the situation in Covid worsens and employment growth slows, it seems like politicians are more likely to agree on a financial aid package. If there’s a “stimulus-less” package, as Stovall put it, and comments from both sides of the aisle are encouraging, it could mean that more stimuli are in the pipeline once Biden is in office, Stovall said.

“A bipartisan incentive is the injection the economy needs, and efforts at overload suggest that more may be ahead,” he said. He added that the spike in Covid numbers will also increase the likelihood that the market will be confident that the Federal Reserve will not hike interest rates anytime soon and become more accommodative in other ways, such as through repurchase agreements.

For short-term traders, a lot of optimism is already built into the stock market. According to CFRA data, 95% of the S&P 1500 subsectors are trading above their 50-day moving averages and 97% are trading above their 200-day moving averages.

The short-term rotation of growth stocks into names that came after the worst first wave of Covid-19 wore off could cause earnings to trend back towards growth once the locks are reinstated and until a vaccine is widely available.

“I’d say that makes stocks vulnerable to some sort of digestion of recent gains,” said Stovall.

The Nasdaq was the only major US stock index that was higher on Monday morning.

For longer-term investors ready to look into the second half of 2020, however, there is one more reason to be optimistic: While stocks continue to rise, Wall Street’s S&P 500 earnings growth estimates have not looked anywhere near this strongly moved.

Earnings growth of 24% was expected for the S&P 500 in the third quarter of 2020, but it’s only declining about 8% right now, according to CFRA. That has made Wall Street analysts more optimistic, but not enough to fuel S&P 500 earnings growth for the second half of next year. Analysts are reluctant to place a big bet until a vaccine is distributed, according to Stovall, but doing so could ultimately add more fuel to stocks.

“The feeling is that the second half of 2021 will be a time for the economy and profits as we ultimately emerge from the lockdown,” said Stovall.

That view is borne out by other technical market strategists, who are looking at what history has to say about the recent Dow and S&P trade spurts, as well as looking beyond the current Covid-19 trendline.

The world’s largest money manager, BlackRock, issued an upbeat forecast for stocks for 2021 on Monday: “The big change in the outlook itself is to improve overall risk-weighted assets and see 2021 as a very constructive year for risk-weighted assets,” said Mike Pyle , Global from BlackRock chief investment strategist.

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