Stellar Year For Stocks Now Suggests Strong Follow-Through In 2020

Could 2020 end up like 2018? Recall that 2017 was strong in anticipation of President Trump’s tax bill, which finally came in December, and 2018 turned into a disappointing “show me” year in which business had to prove to investors that they actually would use their tax savings (within an improved business climate) for capital investment in future growth. So, a similar set up may be in store in that 2019 has been strong in anticipation of a trade deal with China, and 2020 could be another “show me” kind of year for capital investment and growth. However, I think 2018 was inordinately impacted by Trump’s tariffs and decision to confront China’s long history of unfair/illegal trade practices, so 2020 might see the exact opposite reaction given an improving global trade environment. Interestingly, JP Morgan’s strategy team is now predicting 2020 could be the year of the “great rotation,” suggesting next year could be another strong year for equities driven this time by retail investors rotating capital from bond funds into equity funds (similar to 2013). 

I have often opined about our government’s sole reliance from 2009 through 2017 on Fed monetary policy (rather than fiscal stimulus) to prop up the economy doing little more than create asset inflation (and a “wealth effect”), pushing stocks, bonds, and real estate to new highs in correlated fashion. The problem was that it only benefited those who already owned assets – and the more you owned the better you did. This, of course, led to an ever-widening wealth gap and ultimately to a populist movement and extreme societal divisiveness. And although passage of the 2017 tax bill promised to close the gap as Corporate America invested its tax savings within a more favorable business/regulatory climate to everyone’s benefit, instead the trade wars have led businesses to largely postpone capital investment plans until the clouds are lifted. Thus, with income inequality still a huge political issue today, our country now faces two disparate paths: 1) a turn toward socialism, with profligate new entitlement programs and forced wealth redistribution through onerous taxation and asset confiscation, or 2) embracing capitalism and enhanced fiscal stimulus, including middle class tax cuts, further regulatory reform, skills training programs, immigration reform that allows greater numbers of skilled workers, and massive infrastructure programs (including public/private partnerships). When it comes time to vote, I am hopeful that the American electorate makes the wise and thoughtful – rather than emotional – choice.

SPY Chart Review:

The SPDR S&P 500 ETF (SPY) closed Thursday above 317 and has made yet another clean breakout to new all-time highs with leadership from risk-on market segments, as I have been predicting it would. As shown in the monthly chart below, if we look at the post-financial crisis recovery, November brought about the third major upside breakout to new all-time highs, which bodes well for a continuation of the rally well into 2020 (and beyond, depending upon the election outcome), in my view.

SPY historical breakouts

Looking at the SPY chart over the past few months for shorter-term signals, we can see that after a brief consolidation at new highs, bulls are trying to resume the surge. Oscillators RSI, MACD, and Slow Stochastics have all turned upwards. Most of the minor bullish gaps have now been filled, and minor support levels (including uptrend lines) as shown on the chart have been successfully tested, as has the 20-day simple moving average. Bollinger Bands are pinching closer together, indicating an imminent break one direction or the other (likely up). I continue to see the technical outlook as strong, and a signed Phase 1 deal with China could be that next bullish catalyst.

SPY chart

Latest Sector Rankings:

Relative sector rankings are based on our proprietary SectorCast model, which builds a composite profile of each of nearly 500 equity ETFs based on bottom-up aggregate scoring of the constituent stocks. The Outlook Score employs a forward-looking, fundamentals-based multifactor algorithm considering forward valuation, historical and projected earnings growth, the dynamics of Wall Street analysts’ consensus earnings estimates and recent revisions (up or down), quality and sustainability of reported earnings, and various return ratios. It helps us predict relative performance over the next 2-6 months.

In addition, SectorCast computes a Bull Score and Bear Score for each ETF based on recent price behavior of the constituent stocks on, particularly strong and weak market days. A high Bull score indicates that stocks within the ETF recently have tended toward relative outperformance when the market is strong, while a high Bear score indicates that stocks within the ETF have tended to hold up relatively well (i.e., safe havens) when the market is weak.

Outlook score is forward-looking while Bull and Bear are backward-looking. As a group, these three scores can be helpful for positioning a portfolio for a given set of anticipated market conditions. Of course, each ETF holds a unique portfolio of stocks and position weights, so the sectors represented will score differently depending upon which set of ETFs is used. We use the iShares that represent the ten major U.S. business sectors: Financial (IYF), Technology (IYW), Industrial (IYJ), Healthcare (IYH), Consumer Goods (IYK), Consumer Services (IYC), Energy (IYE), Basic Materials (IYM), Telecommunications (IYZ), and Utilities (IDU). Whereas the Select Sector SPDRs only contain stocks from the S&P 500 large-cap index, I prefer the iShares for their larger universe and broader diversity.

SectorCast ETF rankings

Here are some of my observations on this week’s scores:

1.  There are some notable shifts in the rankings this month. Financial has moved into the top spot with an Outlook score of 84, with solid scores across the board, including an attractive forward P/E (16.4x) and improving sell-side analyst sentiment (net positive revisions to EPS estimates). IYF also displays a solid projected year-over-year aggregate EPS growth rate of 9.3%, an attractive forward PEG ratio (forward P/E divided by projected EPS growth rate) of 1.76, good return ratios, and the best insider sentiment (open market insider buying). Taking second is Healthcare with a score of 83, as it similarly displays reasonably good factor scores across the board, including the best sell-side analyst sentiment, a low P/E (16.8x), and an attractive forward PEG ratio of 1.60. Rounding out the top six are Telecom, Technology, Consumer Services (Discretionary/Cyclical), and Industrial. Notably, Technology displays the highest projected growth rate (13.7x) and most attractive forward PEG ratio (1.58), but also the highest forward P/E (21.6x).

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Disclaimer: Sabrient's newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into ...

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