If you pay close attention to our stock market forecasts, the title of this piece will look familiar.
At the end of 2019 we made the same exact forecast for the end of 2020 — the strangest year in our lifetimes, and it’s not even over. Compared to most analysts, this was a very bullish call. And then, when the market hit a pre-COVID19 peak of 3386 in mid-February, if anything we looked not bullish enough.
Then the bottom fell out of both stocks and the economy, struck by a combination of COVID19 and overly-strict government shutdowns. The S&P 500 bottomed at 2237 on March 23, pricing in an 80% drop in corporate profits from the year before, making our call of 3650 look obsolete.
About seven weeks later, on May 8, stocks had recovered back to 2930, but we figured 3650 was probably still obsolete, and so revised our year-end forecast for the S&P 500 to 3100. Still bullish, but from a lower base.
Then, only four weeks later, the S&P 500 had blown through our updated year-end target and was sitting at 3194. So we revised up our year-end target again, this time to 3350.
But, here we are at the end of August and once again stocks have blown through our updated target, closing last week at 3508. As a result, we’re moving our target back up to exactly where we started: 3650.
The key lesson in all this should be that it is a fool’s errand to try to time the market. Imagine being told on February 15 that the world was about to be hit by a widespread virus for which there was no known therapy or cure, that governments were going to react by shutting down massive swaths of their economies, and that US real GDP was about to drop at the fastest rate for any quarter since the Great Depression.
Then imagine you had to make a choice about how you would allocate your investments through year end. Many investors would have opted to sell their equities and not look back. But, as we now know, the better choice would have been to grit your teeth and stay invested.
In order to make a stock market forecast we use a model based on capitalized profits. Our model takes the government’s measure of profits from the GDP reports, divided by interest rates, to measure fair value for stocks.
To be cautious, we’re using the level of corporate profits in the second quarter, when they were down 20.1% from a year ago, and at the lowest level in nine years, a level from which they are very likely to recover in the third quarter and beyond. In addition, we are NOT using the current 10-year Treasury Note yield of 0.7%, which generates absurdly high targets for equity prices. Instead, we’re using a 10-year yield of 2.0%. And at that yield, with profits remaining at second quarter levels, our model says the S&P 500 is fairly valued at 4052.
In other words, we would not be shocked if stocks went even higher than our year-end target of 3650 and barring a major shift in public policy as a result of the election in November, expect further gains in the 2021.
Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous
9-1 / 9:00 am ISM Index – Aug 54.6 54.8 54.2
9:00 am Construction Spending – Jul +1.1% +3.0% -0.7%
afternoon Total Car/Truck Sales – Aug 14.8 Mil 15.0 Mil 14.5 Mil
afternoon Domestic Car/Truck Sales – Aug 11.4 Mil 11.6 Mil 11.2 Mil
9-2 / 9:00 am Factory Orders – Jul +6.0% +5.9% +6.2%
9-3 / 7:30 am Initial Claims – Aug 31 0.950 Mil 0.950 Mil 1.006 Mil
7:30 am Q2 Non-Farm Productivity +7.4% +8.1% +7.3%
7:30 am Q2 Unit Labor Costs +12.1% +7.9% +12.2%
7:30 am Int’l Trade Balance – Jul -$57.0 Bil -$59.4 Bil -$50.7 Bil
9:00 am ISM Non Mfg Index – Aug 57.0 57.1 58.1
9-4 / 7:30 am Non-Farm Payrolls – Aug 1.400 Mil 1.300 Mil 1.763 Mil
7:30 am Private Payrolls – Aug 1.275 Mil 1.000 Mil 1.462 Mil
7:30 am Manufacturing Payrolls – Aug 0.063 Mil 0.055 Mil 0.026 Mil
7:30 am Unemployment Rate – Aug 9.8% 9.5% 10.2%
7:30 am Average Hourly Earnings – Aug 0.0% +0.2% +0.2%
7:30 am Average Weekly Hours – Aug 34.5 34.5 34.5
Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
Infinity Wealth Management, LLC is not owned or controlled by World Equity Group, Inc.
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