Stocks are showing signs of more record highs this year after a possible decline next month as President-elect Donald Trump takes power, according to a historical analysis by Bank of America Merrill Lynch.
The S&P 500 stock index falls by 3.8 percent on average in February after a new president is inaugurated, BofA strategist Michael Hartnett said in a report to clients.
“The bullish sweet spot of Presidential Cycle Year 1 is March to July, which has an average gain of 7.86 percent (average March to August rally of 11.15 percent for a first-term President),” according to the bank’s analysis.
The S&P 500 is set up to rise more than 30 percent to 3,000 from its current level of about 2,270 in the next couple of years, BofA analysts said in a Jan. 19 report obtained by Newsmax Finance.
“Secular bulls start slowly given investor disbelief but build momentum over time as disbelief turns into acceptance,” said Stephen Suttmeier, Paul Ciana and Jue Xiong, technical and research analysts at BofA. “We believe that 2017 could be the year of acceptance for the secular bull trend that began on the April 2013 upside breakout."
The trading range of stocks shows similarities to a pattern last seen before the 1950 to 1966 bull market, when interest rates rose and the S&P 500 rallied more than fivefold, according to BofA.
“The 1950s was a period of higher stock prices and higher U.S. interest rates,” the analysts said. “The U.S. 10-year yield bottomed near 1.5 percent in late 1945 and the S&P 500 remained firmly within its secular bull market until yields moved to 5 percent-6 percent in the mid-1960s.”
The Federal Reserve forecasts that it will raise borrowing costs over the next couple of years as the recovery from the 2008-2009 recession continues. The central bank held rates near zero percent throughout most of the Obama administration in an effort to boost the economy by encouraging borrowing and spending while punishing saving.
Fed policymakers last month forecast that they'll approve three rate increases in 2017 as inflation picks up and joblessness hovers below 5 percent, possibly indicating the economy has reached full employment. They predict the Fed funds rate will rise from 0.5 percent now to 1.4 percent by the end of the year, and to 1.9 percent by the end of 2018.
It "makes sense" to gradually lift interest rates to support the economy, Fed Chair Janet Yellen said on Wednesday in prepared remarks.
"Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road — either too much inflation, financial instability, or both," she said.
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