Will There Be a Year-End Stock Rally?

The first days of September were good for stocks. One analyst says that this fact indicates that there will be a year-end stock rally. CNBC talked to strategist Tom Lee who says there is a 90% chance of a year-end rally.

Perennially bullish strategist Tom Lee believes the S&P 500 is set to rally 6 to 8 percent before the year is out.

That specific number is based on his analysis of prior market moves. Lee found that since 1940, the S&P ended the year higher in 27 of the 30 times it was up by 5 to 20 percent through mid-September.

One might think that election years, which threaten to bring a great deal of uncertainty to the end of the year, may hold something different. But out of the nine election years covered by the above stat, eight of them saw stocks gain in the final 3½ months, Lee says.

Many believe that the current market is overpriced. If that is the case what would drive it higher? One opinion is that many investors are still hurting from the 2008 market crash and have avoided stocks ever since. Some of these folks are finally becoming believers and will push the market up as they try to get back into the market. The problem is that some will probably come in for a slight gain before the market finally corrects!

Will the Market Correct or Crash?

Not everyone believes that a year-end rally is in the cards. Investopedia reports that James Dale Davidson, who predicted the 1999 and 2007 crashes, says a stock market correction is imminent.

James Dale Davidson is controversial economist who famously made accurate predictions of the financial crashes of both 1999 and 2007. Now, he and other leaders in market correction predictions are suggesting that signs are pointing to another impending correction in the markets, and possibly one that is of greater magnitude since any crash since the Great Depression.

Interestingly Mr. Davidson does not believe that sources of current economic and market concern will cause the correction. This is a technical prediction. Many of us would like to see the fundamentals that drive the market higher the 27 of 30 times that stocks were up in September and rallied for the rest of the year. And it would be nice to see what Mr. Davidson thinks will pull the market down if it is not overpriced stocks. With this sort of confusion about the market how should an investor proceed?

Investment Returns and Investment Decisions

The point of investing is to make money and not lose any. As we gain experience with the results of our investments we, hopefully, make better investment decisions. The Economic Times writes about incorrect assessment of returns leading to bad investment decisions.

For most investors, point-to-point return figures serve as the performance yardstick. This can be misleading. The current return profile of equity funds, for instance, is a case in point. The three-year returns of most equity funds comfortably outshine the five-year figures (see chart). Large-cap funds have clocked 13.5% CAGR over the past five years compared to 17.8% over the past three. Mid-cap equity funds have yielded 20.6% CAGR over the past five years against a whopping 34% in three years.

It is an interesting discussion and worth the read. The point is that staying invested, even through events like the Great Recession smooths out the peaks and valleys. You may want to get into the market for a year-end rally but a better choice is probably to pick stocks with high intrinsic value and invest for the long term.

Will There Be a Year-End Stock Rally? PPT

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