Santa Rally On

The “Santa Rally” appears to be in full swing with the S&P 500 climbing another 1.6% and posting its 4^th straight week of gains. In a week where much of the nation’s attention was trained on Washington dysfunction, the stock market focused instead on the expectation of improved fundamentals in 2020, a comparatively less uncertain business climate, and a Fed on the sidelines. Investors are looking more confident than they have in years as they push equities to new highs across the board. The question now is how far stocks have to run. 

Our valuation model shows that based on consensus analyst estimates stocks are trading roughly 3% below our projected value 12 months out. Based on the range of historical data, our model shows that the market could add another 16% over the next 12 months before we would be overly concerned about valuation. The combination of low interest rates and projected earnings growth of around 9% should continue to fuel stocks. However, the pace of an advance also matters. A steady grind higher is preferable to a parabolic move.

As we start to think about 2020, the election will inevitably begin to enter the investor psyche. Thus far, impeachment has been a non-event for the stock market and if anything, support for the President has modestly grown over recent weeks. Our friends at Strategas have long held the view that the 3^rd year of the Presidential cycle is where the sausage is made. Presidents historically increase fiscal and monetary stimulus to shore up the economy going into year 4. With the Fed on hold, the indication of a trade deal with China, and a likely signing of the USMCA agreement, this is exactly what has happened. The economy is on stable footing as the President prepares to take on his challengers in 2020. 

The statistics show that the 4^th year of the Presidential cycle has historically been the smoothest of the 4 on a quarter to quarter basis. Typically, the market begins to sniff out the winner roughly 3 months in advance of the election. The market usually sells off if an incumbent is to be deposed and rallies if they are to be re-elected. In either case, stocks have historically finished presidential election years positive. History is on the market’s side, but if one thing is for sure, the 2020 election will be different than any other. 

*DCM uses this proprietary valuation model to evaluate whether companies are priced higher or lower than their intrinsic values. The intrinsic value is calculated using regression analysis measuring the relationship between price and fundamental variables., and is based on a series of assumptions based on the historical performance of the market.  No graph, chart, formula or other device offered can in and of itself be used to make trading decisions.  Past performance is not a guarantee of future results.