- There’s a good chance that stocks finish 2019 with a powerful rally.
- Catalysts include positive seasonality, strong market breadth, bearish sentiment, desperate fund managers, and a more dovish FOMC.
- Fear of recession and a poor outcome to the trade war have led investors to remain on the sidelines; both factors could now become tailwinds.
A powerful year-end rally in stocks is very likely. It would be fitting given that 2019 has been a sneakily strong year with the S&P 500 22.2% higher.
Market conditions are supportive, and there are a number of powerful catalysts including positive seasonality, underexposed fund managers, strong market breadth, bearish sentiment, and a more dovish FOMC in 2020.
The S&P 500 is up 22% YTD as of Nov. 2, 2019.| Source: stockcharts.com
Seasonality chart for average pre-election year and average year (1950-current).| Source: LPL Financial
This chart from LPL Financial shows a tendency for stocks to have a year-end rally also known as a Santa Claus rally. This is even more pronounced in pre-election years.
When stocks gained more than 20% by the end of October, it resulted in positive gains in November and December 13 out of 14 times. Essentially, bullish seasonality is compounding on top of each other.
Underexposed and Under-Invested Fund Managers
Hedge Funds are under-performing relative to S&P 500.| Source: Morgan Stanley QDS, Hedge Fund Research
Given this reality, underexposed and under-invested funds could become forced buyers. According to a report from Hedge Fund Research, the average hedge fund is up 4.9% over the first three quarters of the year. Fund managers who under-perform their benchmarks are at risk of losing investors, and even their jobs.