10 Reasons Stocks Will Enjoy a Year-End Rally (Part 2)
Yesterday, I shared the first five reasons why I’m convinced the stock market is going to enjoy a year-end rally.
I’ll concede that most revolved around the sentiment and actions of humans – analysts, consumers, newsletter editors and corporate insiders.
Of course, humans are all inherently flawed and prone to making mistakes. So today, let’s take a look at five irrefutable reasons that can’t be so easily dismissed…
Stocks Are Bargains No Matter How You Slice It
As we all know, the easiest way to succeed in investing is to buy low and sell high.
And stocks are definitely “low” based on a variety of valuation metrics, which brings me to my next three reasons the stock market has a good chance of rallying into year’s end…
Reason #6: Free Cash Flow Yields. Based on this measure, stocks are trading in the ninety-fifth percentile of cheapness, according to hedge fund manager, Joel Greenblatt.
He concludes that the extreme valuation could lead to a 15% to 20% rally for stocks over the next year.
Reason #7: Price-to-Earnings Ratios. Today the average stock in the S&P 500 trades at a P/E ratio of just 13.5. That’s 25% below the average P/E ratio of 18 since 1950.
Reason #8: Forward Price-to-Earnings Ratios. Based on next year’s earnings, stocks in the S&P 500 are also about 25% cheaper than average. They currently trade at a forward P/E ratio of 10.2, compared to a long-term average of 13.7 since 1957.
A Volatile Precursor to a Rally
Unless you pulled a Rip Van Winkle for the last couple of months, you’re well aware that volatility’s returned to the market. With a vengeance!
A 300-point swing for the Dow is the norm again. Ironically, though, when volatility spikes, it often signals a tremendous buying opportunity.
Reason #9: Because the VIX Says So. When the VIX Volatility Index (^VIX) rises above 40, the S&P 500 rallies 3.2% over the next three months – and 19% over the next year – according to Bloomberg data.
And guess what? In the third quarter, the VIX surged 160% to hit 42.96.
As James Paulsen, Chief Investment Strategist at Wells Capital Management, says, “A very high VIX level suggests investors have given up, they’re out of the way, and that’s a great entry point.” I concur!
There’s No Better Time Than Now!
The last reason why stocks could rally is simple. Because it’s that time of year.
Reason #10: Seasonality. The fourth quarter is historically the best quarter for stocks.
Over the last 20 years, the S&P 500 is up an average of 4.7% from October to December. And over the last 50 years, the index is up an average of 3.6%.
In terms of the best-performing sectors, consumer discretionary, consumer staples and technology lead the way.
Bottom line: Despite lasting more than two years already, the evidence reveals the current bull market isn’t done charging yet. So I suggest you invest accordingly.
Ahead of the tape,