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Will the stock market bubble explode in 2020? This trader makes a big prediction when it will happen

Brian Sozzi
Editor-at-Large

Enjoy the Great December 2019 Stock Market Melt-Up while it lasts because the reality is, the situation could turn on a dime by late January.

“Some people are looking for a 6% to 8% pullback in January,” said veteran New York Stock Exchange floor trader Tim Anderson on Yahoo Finance.

Adds SEI Non-Traditional Strategies CIO Jim Smigiel, “It’s always good for investors to remember that we are talking about equity markets here. Although volatility has been incredibly low over the last number of years, it is always likely to remind investors that it is there. So a 6% to 8% pullback [in January] would be relatively normal, and should be expected by everyone in the market. Just about anything could cause it.”

Pick your poison as to why the market could get a nice haircut early on in 2020.

The most logical is that complacency has permeated Wall Street to close out the year amid bullishness around the effect of the Fed’s three rate cuts and the phase one trade deal between the U.S. and China. One doesn’t have to look too far to spot said complacency:

  • On Thursday, the Nasdaq Composite (^IXIC) capped 11 straight sessions of gains — taking the tech-focused index beyond 9,000 for the first time. Investors have continued to plow into hot chip stocks, such as Advanced Micro Devices, at inflated valuations. They also continue to scoop up fundamentally struggling tech plays like Intel, which is now hovering around 19-year highs.

  • The S&P 500 equity/put call ratio is at its lowest levels since June 2014, points out Sun Dial Capital Research. In other words, investors aren’t betting on a near-term market sell-off.

  • Meantime, Sun Dial Capital Research notes the S&P 500 has gone 52 days without a +/- 1% daily move. Low volatility — a telltale sign of investor complacency — has been the name of the game for months.

These are but a few worthwhile examples.

At some point — and soon — that complacency will have to get beaten out of investors as it doesn’t jibe with realistic assumptions around global economic growth and corporate earnings.

Speaking of corporate earnings, most pros on Wall Street think 2020 earnings estimates for the S&P 500 are too high and will have to be revised lower. S&P 500 components are expected to deliver at least 10% earnings growth in 2020 which appears too ambitious given sluggish global growth and trade war risks. If earnings estimates begin to fall as many on the Street believe, it would likely pressure stock valuations.

Even if one could justify the S&P 500 delivering 10% earnings growth in 2020, stocks don’t look too attractive compared to a rich 19 times price-to-earnings multiple on the index right now.

“We do think earnings expectations are going to come down, they tend to do it every year. They start off on a high water mark and we end the year significantly lower than that. We think 10% earnings growth in 2020 is a bit aggressive to us,” Smigiel says.

And last but not least in terms of a January market pullback driver, stocks have mostly surged this month on no new news. Sure there was the U.S./China phase one trade deal getting done, but that was expected for months. And yes, Amazon announced a record-breaking holiday sales season on Thursday — but even that should have been seen coming amid the strong online sales data from Black Friday and Cyber Monday.

“I enjoy market melt-ups as much as anyone, but there’s an eventual downside to them too, as we saw in January/February 2018 and I don’t want anyone starting 2020 on the wrong foot,” cautions Sevens Report Research founder Tom Essaye. “So, while there’s no reason to try and stand in front of this market into year-end, as there’s almost no identifiable news/events that would derail the rally over the next few days, I do want to point out that almost all of the December gains (which now are approaching 4%) have come on almost no material news—and that should temper the optimism a bit.”

As we said, enjoy the market melt-up while it lasts.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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