Why S&P 500 is set for 32% appreciation in 2019

Leading analyst tells advisors they are in for "delayed gratification" after the Christmas Eve market plunge

Why S&P 500 is set for 32% appreciation in 2019

A leading US analyst has predicted a 32% appreciation for the S&P 500 in 2019 because of “delayed gratification” after the mid-term elections.

Phil Orlando, Senior Vice President, Chief Equity Strategist at Federated Investors, believes the rally that started after the Christmas Eve drop will continue through to the end of the calendar year.

Addressing an audience at The National Club in Toronto yesterday, US-based Orlando put forward his outlook for the year ahead and beyond, tying in political factors to predict how the market may perform.

He began by admitting that 2018 had not unfolded as expected. His prediction that it would be a barbell year, which included an 8% air pocket of stocks before the market found its sea legs during the run-in to Christmas, did not bear out.

Instead the market was strong all the way to its peak on September 21 before a 20% plunge that bottomed out as investors were tweaking the tinsel on December 24.

Orlando put this down to a “toxic sentiment” that priced in a recession in 2019. And rather than the predicted air pocket, we got a “waterfall collapse” as price-earnings multiples went from 18x to 14x.

He added that it was a sentiment that came from a number of uncertainties: the Federal Reserves’ flip-flopping on rate hikes; the trade tariff skirmish; geopolitical risk, headed by Brexit, and featuring many of the world’s top-10 economies; the Mueller investigation, of which the outcome is unknown; a divided government in Washington and the subsequent government shutdown; oil price volatility; the strength of the dollar; and slower domestic growth and corporate earnings growth.

While many of these remain worries, the sentiment has been lifted enough for the market to rebound by about 14% as recession fears have eased. Enter the delayed gratification theory.

Orlando pointed to historical performance, which tells investors that after the mid-terms, things improve towards the end of the year.

He said: “The delayed gratification is that we fully expect stocks to end 2019 at the same place they would have ended if we had followed a more traditional path. So that additional move down gives us the potential for additional alpha we can pocket.

“We think there is going to be a very powerful rebound from Christmas Eve through the end of the calendar year.”

Orlando compared the current situation with that in 1984 and 1994 – also mid-term years – and then also compared the subsequent years afterwards. In ’84, the S&P experienced a 13% volatility range, earnings were good and the year ended relatively flat at a 2% increase, while in ’94 the range was about 10%, earnings were again good and the market was down 1.5%.

Orlando argued that there were strong echoes last year, with a 20% range, even stronger earnings and the market down 6%.

He said: “Our prediction is that the 20% correction in stocks will be reversed over the year. We expect the stock market, the S&P 500, to get to the 3100 level by the end of the year, so off of the bottom on Christmas Eve, that would indicate a 32% level of appreciation for the S&P.”

Orlando added that there have been five other instances in the past 70 years where the stock market declined from the period from the mid-terms to the end of the year, with the average decline in that period at 5%. 

“The important question is how does the stock market do in the subsequent years? It rebounded in every single instance – the average return from that trough through the end of the calendar year was up 32%.  That’s just purely coincidental [to my forecast] but it’s eerie.”  

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