Despite wild volatility this year, the S&P 500 is barely positive for the year, and it’s still a coin toss whether stocks finish 2015 in the green.
“It’s like a horse race,” said Sam Stovall, chief equity strategist at S&P/Capital IQ. Stovall said if the market ends down this year, it would only be the second time since World War II that the third year of a presidential term was negative. But odds are that the market will be higher, even if just slightly.
Helped by a more than 4 percent jump in oil prices, the S&P 500 ended Wednesday with a 1.2 percent gain at 2,064. That gain turned it positive on the year-to-date, and it’s just six points above its Dec. 31, 2014 close of 2058. The Dow rose 1 percent Wednesday, to 17,602, but it is further from breakeven and is still down 1.2 percent year to date.
Stocks looked set to open little changed Thursday.
After Thursday’s half-day session, there will be just five more trading days left this year, and according to “Stock Trader’s Almanac,” stocks are typically higher on those five days, as well as the first two of January.
“I think Santa got off to a late start, but I think he’ll make up for his late start,” said Stovall.
Stocks close at 1 p.m. Thursday and are closed for the Christmas holiday Friday. There is weekly unemployment claims data at 8:30 a.m. ET.
Scott Wren, equity strategist with Wells Fargo Investment Institute, said he expects stocks to finish the year higher, setting up for a positive 2016.
“I wouldn’t be surprised if fairly quickly in the new year, there’s a new high in the S&P,” said Wren. Wren said the bull market is in its “seventh inning” but he expects it to continue higher for a while, based in part on improved earnings in 2016. His S&P 500 target is 2280.
No matter how this year ends up, it’s likely to be fairly flattish. There were 10 instances since the 1940s when the S&P 500 moved less than 3 percent in either direction, Stovall said. He noted that in the following year, the S&P 500 was positive eight of the 10 times, with an average gain of 13 percent.
The last flat year was 2011, when the S&P finished down by less than 0.1 point. That was also the only negative year for the S&P in the third year of a presidential term. Stovall said 1947 was a flat year but the rest were higher.
The S&P 500 saw a dramatic increase in volatility in 2015, compared to 2014. It was either up or down by at least 1 percent on 72 trading days. That compares to just 38, 1 percent days in 2014, which was half of the average going back to the year 2000.
“While we had an awful lot of up and down days, the percent change between the high for the year and the low for the year was the eighth narrowest since World War II,” Stovall said. The S&P’s high was 2,134, and the low was 1,867.
“History says that in the subsequent years, a narrow range should not be thought of as a coiled spring, ready to jump but rather when you have a narrow range, it usually ends up with a pretty small advance,” he said. The average advance the following year was about 4 percent, and the S&P was up more than half the time.
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Stovall said the years with the widest volatility typically have a bigger S&P gain of 12 percent and are up about 80 percent of the time. “We had a narrow range, which implies a lackluster 2016,” he said. “Maybe we end up with a flat year but more likely we end up with a mid-single digit price appreciation.”
Now that the Fed has raised interest rates, the market could also be more volatile, based on history. Stovall said in the first three months the number of volatile days after rate hikes increases an average 77 percent.
If stocks end lower on the year, it would be highly unusual statistically for a negative outcome in the third year of a presidential term. Stovall said in a presidential election year, like 2016, the market is usually higher — up 6.1 percent of the time with an average 76 percent history of an advance.
Stovall has a target of 2,250 on the S&P 500 for the end of 2016. “If we break above the 2,130 level, then I think the market moves quite swiftly to the upside, and that could be a very positive indicator. I do see next year being volatile,” he said.
In a note, Stovall pointed out what could be a positive for stocks. He noted that the 10-year Treasury’s current 2.26 percent yield is very close to the S&P 500’s dividend yield of 2.1 percent.
“This narrow spread continues to offer encouragement to equity bulls, as they attempt to divine the market’s performance in 2016. Since 1953, whenever the 10-year Treasury yield was higher than the 500’s yield by less than 100 bps, the S&P 500 gained an average 12 percent in price during the subsequent 12 months, and recorded positive results nearly 90 percent of the time. When the yield on the S&P 500 was higher than that for the 10-year, however, stocks rose an average 19 percent and gained in price about 80 percent of the time,” he wrote.