The S&P 500 Index is within 1% of our year-end fair value S&P 500 target of 3,000 after rallying 20% this year and broaching that target several times in July. We set that target in November 2018 and have maintained it since then. Now that we’re close to reaching the target, is it time to sell?
We don’t think so—primarily because the market is giddy about rate cuts. The adage “Don’t fight the Fed” applies here. The last five times the Federal Reserve (Fed) began cutting rates outside of recessions (1984, 1987, 1989, 1995, and 1998), the S&P 500 rose an average of 11.1% over the subsequent six months and 15.8% over the next year, as shown in the LPL Chart of the Day, Initial Rate Cuts Outside Of Recessions Have Helped Stocks.
LPL Chief Investment Strategist John Lynch noted, “Even though fundamentals may not justify the market going much above our 3,000 forecast on the S&P 500, with the Fed tailwind behind us, we’ll ride the wave for now.”
We also recognize stock market forecasting is an art, not a science. We use all available information to make forecasts and try to get as close as possible but stocks can remain over- or undervalued for extended periods of time.
We’re maintaining our year-end fair value target range of 3,000 for the S&P 500 for now, but we certainly could raise our forecast if clarity on trade and monetary policy support result in an improved earnings outlook. At the same time, we would consider reducing equities allocations if the market’s giddiness about Fed rate cuts goes too far or fundamentals deteriorate. With the Fed at our backs, we recommend suitable investors maintain their targeted equities allocations. If we do get a bout of volatility, we’ll be looking to potentially add equity exposure on weakness.
Please see the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets for additional description and disclosure
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