December to Remember? The Case for a Year-End Market Rally
Russell Investments' Steve Wood has a 1,300 year-end target for the S&P 500 and he's sticking to it. From current levels that means Mr. Wood needs about a 9% rally between now and the market close on December 30th. Markets certainly have the volatility to pull off a move of that size but it's going to require a sharp u-turn in sentiment. With the "headwinds" blowing like a gale, the onus is on Mr. Wood to explain how we get there from here.
Wood starts by acknowledging the concerns. "You've got a huge question mark which is 'how badly can politicians screw things up this week?'" He's talking about Europe, but clearly the question applies to the entire Western world at this point. Despite domestic bungling Wood insists "the source of risk causing volatility is coming from Europe."
Wood says getting the Eurozone off our front page is the first step for his rally. "When those European dark clouds pull aside and earnings and economic strength in the U.S. show through you're getting close to that 1,275 - 1,300 on the S&P," he says.
An improvement would seem impossible at the moment but Wood says they already have the playbook. "Europe is clearly in a Bear Stearns environment," he says. That's a good and a bad thing. The bad is a seizure of the financial markets as interbank lending comes to a terrifying halt. The good part is America dealt with the real Bear Stearns and came up with a solution, stop gap and flawed though it was.
In addition to "Les TARP" Wood says the Eurozone needs to rid itself of Greece and create enough liquidity to stop the run on the banks, thereby eliminating the contagion risk making investors so tweaky. Do that, says Wood, and investors will finally see an improving economic picture in the U.S., a resumption of growth in China, and improved emerging markets.
Plug those into the mix and Wood sees 1,275 to 1,300 on the S&P 500 as a conservative target, if not for year end then certainly during the first quarter of 2012.
There are a lot of "ifs" in Wood's thesis, not the least of which being the idea that Europe can deal with the amputation of Greece and what he says is the end of Europe as we know it without triggering a global market crash. The jury is out on whether or not a plan that could save Europe would be possible with a unified Europe, let alone what we have now.
IF such Europe stops fighting long enough to put together a coherent centralized banking arm, THEN 1,300 is a realistic level. Until then even Wood realizes his target is on hold, at best.
