Shares poised to finish a mighty 2020 as January dangers loom

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

NYSE

At the end of trading next Thursday, the bull market will be ready to run through 2021, but likely at a slower pace.

January is the month Wall Street tradition says sets the tone for the year – "this is how January goes, this is the year," as the saying goes. This January could be challenging as the spreading pandemic slows the economy and the important Georgia Senate holds elections on January 5th.

Joseph Biden is sworn in as president on January 20th.

"It's a year-end autopilot market," said Sam Stovall, CFRA chief investment strategist. In three out of four years the market will see a year-end Santa Claus rally, but Stovall is also waiting to start trading in the first five days of January for any signs of how the market might trade in 2021.

If the market is higher in the first five days, history shows the S&P 500 is up 82% for the full year, with an average gain of 12.5%.

"There are things that we might be worried about in January. If it were real worries, the market would already react or already step on water," said Stovall. "What scares me is that the market is building itself. It's a correction in the search for a catalyst and we don't yet know what the catalyst is."

Some strategists expect a pullback earlier in the year, but the consensus is that the market will end higher in 2021. The average expectation for the S&P 500 by the end of 2021 is 4,056, according to a CNBC poll of strategists.

Stovall said the market has gotten expensive and there are signs of foam. The 12 month value for money for S&P 500 companies is 41% premium versus the average multiple of 16.7 dating back to 2000.

"I don't really believe that the first few days of January should set the direction for the market for the year’s balance sheet," said Michael Arone, chief investment strategist, State Street Global Advisors. "If [stocks] do actually rebound, that is more of a sign of strength. But if they hiccup I wouldn't throw in the towel."

The outcome of the Georgia races is a wild card for stocks and regardless of the outcome, it could trigger a market reaction. Should there be a surprise and the Democrats win both seats, the Senate would be split evenly between Republicans and Democrats. This would mean the elected Vice President Kamala Harris cast the votes.

Some strategists say the market could sell out if the Democrats win, as investors fear the party would have the votes to pass the Biden-favored tax hikes. On the flip side, a GOP win could spark a relief rally.

But Stovall said the market could rebound towards a Democratic victory if investors considered the prospect of a bigger infrastructure and stimulus package, favored by the Democrats.

Arone said uncertainty over the current $ 900 billion stimulus package, approved by Congress last week, could be a cause for concern if President Donald Trump decides to veto or not sign the bill.

The president criticized the package, saying individuals should be given more than the $ 600 that would go to many adults and children as part of the relief.

The law extends unemployment benefits to millions of Americans, and those benefits will expire on December 31st unless signed up.

"We face deadlines rather than just being a political matter," said Peter Boockvar, chief investment officer at Bleakley Advisory Group. "There are actual deadlines for services that expire. Because of the deadlines, the market assumes that they will be exceeded."

But the concern will hang over the market until it is resolved.

Quiet trading is expected in the coming four-day holiday week. There are few economic reports; Jobless claims on Thursday are being closely monitored. The following week, the December jobs report is expected to show a weaker labor market, with some estimates suggesting only about 100,000 jobs or fewer added.

9 month old bull

The S&P 500 starts the final week of the year up around 15% for 2020, but from the March low, the index has risen around 65%. The bull market turned nine months old this past week.

According to CFRA's Stovall, that nine-month gain is more than double the average nine-month gain of 32.2% for all bull markets since WWII. Over the remainder of the bull markets, their average growth was only 20.3%, showing a slowdown in the profit rate.

"After those typical jackrabbit starts, the bull market advance rates typically slowed and saw lower average annual rates for the remaining bull market runs," noted Stovall. Based on previous bull markets, he said returns could slow to around half of their current profit for the remainder of the bull run.

Calendar for the week ahead

Tuesday

9:00 am S&P / Case-Shiller real estate prices

Wednesday

8:30 a.m. Advanced Leading Indicators

9:45 am Chicago PMI

10:00 a.m. Pending home sales

Thursday

8:30 a.m. unemployment claims

Friday

New Year

Markets closed

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