December is here. Small gift buying stirs the season. Yet, that’s not what keeps stocks rising. Visible U.S. share buying is typical seasonal performance chasing by mutual fund managers. Late year markets like to stage a Santa Claus rally.
Look 3 years back to fully grasp current S&P 500 valuations. 2013 saw +32% returns. U.S. QE reflated stocks. In 2014, U.S. stocks rose +12% on a last pop from U.S. QE. In 2015, QE ramped up in Europe and Japan. On top of that, a Chinese renminbi re-set, and EM fear and recessions strengthened the USD more. Hence, S&P500 annual returns are near zero.
What compels visible U.S. optimism?
Plentiful U.S. job hiring and better U.S. wages build confidence. Stock wealth. Demographics and policy build Health Care. House buying is stronger. U.S. stocks also saw sudden algo-machine assisted selling in August. This lowered valuations as winter approached, and put a correction in play for the first time in 3 years.
What’s alive for pessimists?
Strong dollar issues shoot U.S. manufacturing competiveness. Saudi production decisions pushed Dec. WTI oil to $40 a barrel. All of 2016 looks pathetic for Oil producer profits. The net? –Flat U.S. GDP growth and meager all-in S&P500 EPS growth. Worries about a high yield blowup in Energy spooks the outlook for bank Financials.
Is it time to buy the U.S. in early December?
It’s a mixed picture. Ahead, the Fed hikes rates 25 bps in Dec and 50-75 bps in 2016. In an election year, the Fed likes to stay sidelined. That’s not new news. It’s baked into stocks. The S&P500 should finish 2015 above 2100. The big positive: 2015 U.S. 5.0% unemployment. Hiring momentum is solid. This builds income confidence across the U.S. economy.
Pricey U.S. share valuations can unsettle trader sentiment. Still, it’s a 2016 look ahead.
U.S. stock markets are well priced – but traders can look across all of 2016 optimistically. Consolidation hit in mid-August. Before the Aug. sell-off, the S&P500 traded at 16.6x forward earnings vs. a 10-year average of 14.1x. Dec. stocks trade at 16.4x forward earnings. 12 months ahead, a majority of Zacks strategists still call for an S&P 500 at 2,300, given a paltry 10% chance of a U.S. recession (including me).
Bulls see room to run as China rate cuts sink in. Asian and European share momentum is visible. A weaker renminbi and euro reshapes global competiveness. Bearish sages point to (-10% to -20% downside) rich U.S. valuations. Range-bound sages say listless global growth amid a record commodity and oil price collapse lingers into 2017. 10-year U.S. rates head down, as European QE heads up. The Fed keeps its U.S. rate raises across 2016 spare.
U.S. GDP growth should be the top-of-mind fundamental in investor’s minds.
Final Q3 growth came in at +2.1%. Final Q2-15 GDP grew +3.9%. Winter Q1 ended up at +0.6%. Q4-14 GDP was +2.2. Q3-14 GDP growth was +5.0%. Q2-14 was +4.6%. Winter Q1-14 GDP was -2.1%.
“Muddle Through” +2.2% to +2.5% U.S. GDP growth is our call for 2015. 2016? Be cautious.