Historical Context and Market Trends

This commentary aims to provide a formal analysis of the potential market movements as we approach the close of the trading year, advocating for a balanced investment strategy that considers both the opportunities for gains and the risks of market corrections.

Historically, equity markets have shown a propensity for positive returns during the final six weeks of the trading year, with December often concluding as a month of gains approximately 75% of the time. This trend provides a backdrop for our current market analysis, suggesting a likelihood of concluding the year with a rally.

Recent Market Developments

In our previous commentary, we discussed the prevailing market optimism surrounding the anticipated policies of President-Elect Donald Trump. However, market sentiment has since experienced moderation, as evidenced by last week’s retraction, bringing us back to levels observed in mid-October. Despite this pullback, we maintain a cautious optimism regarding stock performance for the remainder of the year.

Current Market Valuation and Potential Outcomes

The market continues to grapple with valuation concerns, with P/E multiples extending well beyond historical averages. Nonetheless, the recent sell-off might serve as a precursor to a year-end rally:

Bullish Scenario: We posit a 50% probability for a Santa Claus Rally, projecting an increase in the S&P 500 by 2-5% from current levels, potentially positioning the index between 6000 and 6200. Small-cap stocks, currently undervalued relative to their large-cap counterparts, might exhibit even more substantial gains.

Melt-Up Scenario: There exists a 20% chance of a significant market surge or “melt-up”, where the S&P 500 could advance by 5-10%, taking the index towards a range between 6200 and 6500.

Stasis Scenario: A 20% likelihood exists for the market to essentially hover without significant directional movement, resulting in a year-end closure between 5850 and 6000.

Bearish Scenario: With a 10% probability, economic cracks could emerge, prompting heightened market volatility and a possible correction of up to 10%, potentially dropping the S&P 500 to the 5400 level.

Conclusion

Combining the probabilities, our outlook leans towards a moderate bullish stance, expecting a year-end rally that would see the S&P 500 closing between 6000 and 6200. This expectation is underpinned by historical seasonal trends, the recalibration following last week’s market dynamics, and the anticipation of policy-driven economic stimulus. However, investors should remain vigilant, as the market is subject to various macroeconomic, geopolitical, and idiosyncratic risks that could alter this trajectory.

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DISCLOSURES

The S&P 500 index covers the 500 largest companies that are in the United States. These companies can vary across various sectors. The S&P 500 is one of the most important indices in the world as it widely tracks how the United States stock market is performing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed.

No investment strategy can assure success or completely protect against loss, given the volatility of all securities markets. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future. All performance referenced is historical and is no guarantee of future results. Securities investing involves risk, including loss of principal. An investor cannot invest directly in an index.

The information in this communication applies solely to the intended audience and in no way amends, revokes, or otherwise alters the existing agreements and relationships between WPIM and its clients.  This communication is not a binding offer, expressed or implied.  WPIM undertakes no obligation to update or revise the information herein or in any referenced third-party resource due to new information, future events or circumstances, or otherwise.

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