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Pro Analysis

Santoli: Market in better shape than same time a year ago, year-end rally possible

Traders work on the floor of the New York Stock Exchange (NYSE) in New York.
Michael Nagle | Bloomberg | Getty Images
Traders work on the floor of the New York Stock Exchange (NYSE) in New York.

Though game conditions appear similar to this time last year, it's probably a bad call to rely on the fourth-quarter 2015 market playbook for the rest of 2016. And this has almost nothing to do with a certain imminent election.

First, the cosmetic similarities to a year ago.

One week into November 2015, the S&P 500 was at 2078, sitting on a slim year-to-date gain as investors broadly expected the Federal Reserve to nudge short-term interests up by a quarter-point in December. Crude oil then was at $44 and change and looking vulnerable.

All of that rhymes for sure. The S&P closed Friday at 2085, nursing modest gains for the year and a December Fed rate boost is likely. Crude oil has backed off by a quick 10 percent and is right back at $44 and change.

S&P 500, 1 year

If taken as reliable omen, these echoes would be pretty worrisome. Stocks chopped their way lower in November and December last year before global risk-asset markets fell apart in January and February on concerns about a slowing China, rising dollar, declining corporate earnings, sloppy liquidation in oil and hostile credit conditions.

Stocks ultimately would rush to a 15 percent loss by mid-February. And even after a powerful rebound as macro and currency indicators calmed, the S&P 500 didn't trade back up to its Nov. 3, 2015, level until early June of this year.

Maybe it's of some comfort to those in the market, then, that the differences between the current setup and a year ago mostly tilt toward the positive. The technical, macro, policy and sentiment factors that combine to drive the market are not shining a bright, green light. But they're generally in a better position than last year.

-The stock market's underlying action is a bit firmer. When the S&P 500 hit 2100 in early November of last year, it had gone nearly vertical in October in giddy recovery from the late-summer correction. Yet it was precariously perched on a narrow set of stocks: While only 1 percent from an all-time high then, fewer than 30 percent of S&P 500 stocks were in a technical uptrend. In the past week, with stocks sitting around 4 percent from record highs, nearly 70 percent of large-cap issues were in an uptrend, according to Chris Verrone of Stragegas Research.

The winter purge resulted in a true washout in many areas of the market, and the recovery by the majority of stocks has remained underway, if fitful. While the market might not be fully "in gear" for an upside run, it seems better supported.

-The macro mosaic looks a bit friendlier than a year ago. China was seen at risk of a "hard landing" a year ago, and in recent weeks has shown better-than-forecast manufacturing data. Industrial metals prices were melting down 12 months ago, along with oil and emerging-markets currencies and equities. Today, base metals are rallying strongly.

U.S. growth was fading back then, the Atlanta Fed GDPNow forecast for the fourth quarter of 2015 drooping to 1.9 percent; currently it's handicapping a 3.1 percent expansion rate.


Source: Atlanta Fed

Credit markets and a surging dollar late last year were warning signs of tightening financial conditions that the stock market ignored until it couldn't. These are both more benign, with the U.S. dollar index slightly lower than 12 months ago and the risk spread on the benchmark junk-bond index at 5.15 percentage points, down from 5.94 a year ago and a high of 8.64 in February.

The U.S. Treasury yield curve – the gap between the 10-year and two-year yields – was compressing in an alarming way last year, but has been widening back out in recent weeks. And while last year's Fed rate hike was thought to be the start of a resolute tightening cycle with at least four to follow in 2016, the Fed has bent the likely path of rates significantly lower even if we get the December bump, as expected.

-On the corporate front, we're now at a better point in the earnings cycle than we were a year ago, when corporate profits were still dropping sharply in the midst of a five-quarter earnings decline led by energy companies. This so-called earnings recession has ended, with S&P 500 members on track for 2.7 percent rise in third-quarter earnings, compared to a 2.2 percent decline at the same point a year ago.

Forecasts for 2017 earnings are still probably too high, but this is a fairly normal pattern. And stocks, after the recent pullback, are less expensive than they were in early November 2015: The forward 12-month price/earnings multiple then was 16.6, today it's 15.9, according to FactSet.