As stocks close out 2019 with potentially the best gain in decades, strategists expect Wall Street's bull market to continue in 2020 as long as it appears President Donald Trump will be re-elected.
Analysts see the possibility of a slight pullback early next year, after this year's 29.2% surge so far in the S&P 500. But the market is still expected to go higher, with analysts targeting an average 3,320 for the S&P by the end of 2020, according to a CNBC survey.
"Since World War II, the average gain in the fourth year of a presidential term is 6.3%, and it's up 78% of the time," said Sam Stovall, chief investment strategist at CFRA. The price gain in the S&P is even better, with an average 6.6% gain, if it is a Republican seeking re-election, and the market has been higher each of the six instances of this since World War II.
The S&P 500 has returned more than 50% since Trump was elected, more than double the 23% average market return of presidents three years into their term, going back to 1928, according to Bespoke Investment Group.
Trump was impeached by the House of Representatives this month, but his trial in the Senate is not expected to lead to his removal from office and the market has so far ignored the proceedings.
"Most people believe that Trump will be re-elected, and only if we start to get a true challenger could that possibly cause increased volatility," said Stovall. There could be some hiccups when the Democratic field is narrowed depending on who the candidate is in the November presidential election, Stovall said.
"The only two people palatable to the market, in my opinion, are Bloomberg and Trump, and I don't really think Wall Street knows how to curve or score Buttigieg," he said. Former New York City Mayor Michael Bloomberg joined late in the race and is pulling low poll numbers, while Mayor Pete Buttigieg of South Bend, Indiana, made some inroads but is still well behind the leaders.
Front-runner Joe Biden has discussed raising taxes, and Sen. Bernie Sanders of Vermont and Sen. Elizabeth Warren of Massachusetts, who want "Medicare for All," are viewed as too progressive by many investors.
On the near-term horizon, stocks have a good chance of rising into the final day of this year, based on history. The S&P 500 ended the past week with a 0.6% gain, at 3,240 and could keep rising in a late December "Santa rally." According to Bespoke, in the 21 years since 1928 that the S&P 500 was up more than 20% for the year, it gained an average 1.3% in the final week of the year and was higher four out of five times.
So far, the S&P is having its best year since 2013, but if its gain rises above 29.6%, it will be the best year since 1997.
The coming week is broken up by the Jan. 1 market holiday on Wednesday. There are a few economic reports to monitor, with Friday's calendar the most important. The important ISM manufacturing data is reported that morning, as are monthly car sales and construction spending. The Fed releases the minutes from its last meeting later that afternoon. There is home price data and consumer confidence Tuesday.
Stovall said beyond the election, another risk for next year could come from the Fed, if inflation readings begins to rise.
"Another risk is if we see the economy start to show signs of recovery too swiftly and start to see inflation numbers creep higher, investors will start to worry that not only is the Fed done cutting but they may have to think about raising rates again," said Stovall.
Stovall said the other challenge for stocks will be to see if fundamentals can catch up with now much higher price-to-earnings ratios.
"We're already at 19 times forward earnings. My feeling is we either start to see a dramatic acceleration of earnings growth expectations or we have to digest these gains," he said. "Maybe it won't happen until the beginning of January, but I think we're getting ahead of ourselves."
Analysts say there could also be other unanticipated events, like a new round of trade anxiety, but the belief for the most part is the White House will do its best to keep the economy on a positive track.
There is a concern that investors could miss out if they are too worried about the election, which already has strategists assessing how different sectors could be hit by Democratic candidates.
"The headlines and the anxiety that can typically come around an election have been pulled forward, and my fear is it will lead to inaction," said Cayman Wills, global head of equities at J.P. Morgan Private Bank. Wills said in a recent interview that she is fairly optimistic for next year.
"We've been focusing more on longer-term themes that can get clients invested and engaged that go beyond the election cycle, and you don't lose out on potential returns," she said.
Stovall said the 2019 performance of both stocks and bonds bodes well for next year, when looking at history going back to 1976. Since then, the S&P 500 has averaged a 12.9% gain. The Barclays Aggregate bond index, representing a diversified bond portfolio, was up 8.5% for 2019, above its average 7.5% return, he said.
Following years in which both stocks and bonds are making above-average returns, the stock market has done well, with the S&P up 14% in the next year and rising 82% of the time. Bonds averaged gains of 8% in the next year and rose 10 of 11 times. Bonds increase in value when yields fall.
8:30 a.m. Advance economic indicators
9:45 a.m. Chicago PMI
10:00 a.m. Pending home sales
9:00 a.m. S&P/Case-Shiller home prices
9:00 a.m. FHFA home prices
10:00 a.m. Consumer confidence
New Year's Day
8:30 a.m. Initial claims
9:45 a.m. Manufacturing PMI
Monthly vehicle sales
10:00 a.m. ISM Manufacturing
10:00 a.m. Construction spending
2:00 p.m. FOMC minutes