The S&P 500 Index may be poised for another surge in December, building on its remarkable 25% gain so far in 2019, according to Sam Stovall, chief investment strategist at CFRA Research. Key drivers, in his opinion, will be optimism about the economy and a trade deal. Stovall also sees ample historical precedents for a December rally.

"Seasonal optimism typically gathers additional steam in the final month of the year as investors look to earnings projections for the coming year. Indeed, since 1945, the S&P 500 posted its best average return in December, along with the highest frequency of advance and lowest level of volatility, " Stovall writes in his latest report from CFRA, titled, "A Favorable Finale?"

Key Takeaways

  • Since 1945, December has been the best month for the S&P 500.
  • Since 1995, all S&P sectors have been up on average in December.
  • Since 1995, the vast majority of sub-industries also have risen.
  • The S&P 500, Nasdaq 100, and Russell 2000 all show momentum.
  • Optimism about trade and the economy are positive catalysts.

Significance For Investors

Looking at history from 1995 onward, Stovall notes that all the broader U.S. stock market indices have recorded positive average returns in the month of December, with small cap and value stocks prominent among the leaders. He also finds that all 11 sectors in the S&P have, on average, posted gains in December, with the top performers being communication services, real estate, and utilities. The laggards have been information technology, consumer staples, and health care. However, even these laggards have advanced in December, on average.

Drilling down yet more, Stovall examined the 101 sub-industries within the S&P 1500 that have been in existence for at least 20 years. He reports that 87% of these have, on average, posted gains in December from 1995 onward. The leaders have been fertilizers & agricultural chemicals, homebuilding, and home improvement. The worst performers, all of which have declined in price during December, have been computer & electronics retail, leisure products, semiconductors, wireless telecom services, specialty stores, motorcycle manufacturers, and apparel & luxury goods.

Looking at recent market performance, Stovall sees various technical indicators that point to continued advances in December. The Russell 2000 Index of small cap stocks finally broke through a year-long resistance level. Small cap valuations suggest additional upside potential, given that the S&P 600 is trading at an 8% discount to its average P/E ratios since 1995 on both an absolute basis and relative to the S&P 500 P/E. Lastly, the S&P 500 and the Nasdaq 100 have recorded 12 new all-time highs since late October, indicating strong upward momentum.

Looking Ahead

Morgan Stanley, meanwhile, offers a bearish view, per the recent "2020 Outlook" report from their U.S. equity strategy team led by Mike Wilson. While the firm's own economists expect global GDP growth to rise from 3% in 2019 to 3.2% in 2020, they forecast U.S. growth to stabilize at a modest 1.8% in 2020.

Moreover, while the consensus among analysts is that S&P 500 EPS will rise by 10% in 2020, Morgan Stanley estimates that profit growth will be closer to 0%. If Morgan Stanley is correct, a December 2019 rally is likely to be followed by a reversal in 2020.