After a huge year in 2019, the SPDR S&P 500 ETF Trust (NYSE: SPY) is already up another 4.8% so far in 2020 in less than two months. Years of record highs have pushed the market’s valuation in line with previous market tops.
Tom Essaye, founder of Sevens Report Research, said Wednesday there are at least three reasons why stock prices could keep headed higher in the near term.
Factors Propelling Stocks
The first reason the market could keep rising is because the Federal Reserve remains dovish. Despite the fact that the U.S. economy is booming the effective fed funds rate is only 1.55%, much closer to 0% than its previous market cycle peak of 5.26% back in 2007.
The second reason stocks could keep rising is that so far, the economic fallout from the COVID-19 virus appears to be only temporary. In fact, Essaye said investors are seemingly anticipating any lost earnings in the first quarter will simply be recovered in later quarters.
Finally, Essaye said the market could continue to move higher as long as it appears Donald Trump is likely to get re-elected in November. According to PredictIt, there is currently just a 45% chance a Democrat will win the election, down from a 56% chance three months ago.
For now, the S&P 500 is trading at an earnings multiple of around 20, the high end of its historical range. Some analysts and experts have been saying that an expanded multiple is the “new normal” for the market heading forward, and Essaye said investors should always be skeptical of the “it’s different this time” argument.
“If anything goes wrong (Trump stumbles politically, we get an inflation spike that makes the Fed less dovish, or economic growth doesn’t rebound the way people expect) then we are looking at a 17X or 18X multiple on stocks, which would equate to a 348 to 522 point drop in the S&P 500, and that’s a 10% - 15% pullback!” Essay said.
Stock market perma-bulls have been making the “it’s different this time” argument during each market peak for centuries. One of the biggest risks associated with the current market valuation may be how long it has been since the last market top and the fact that many younger investors have never experienced a bear market before.
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