S&P 500: Could December Outlook Be Like 2018?

In November, the S&P 500 Index (SPY) rose 3.4%—the highest monthly gain since June. Notably, in December 2018, the S&P 500 Index lost 9.2%.

What could impact the S&P 500?

The US-China trade deal has entered into unchartered water. The US and China haven’t confirmed the venue and date to sign phase one of the trade deal. A Reuters report suggested that phase one of the trade deal might not be possible in 2019. Since markets are pricing in a trade deal, failure to reach phase one could trigger an S&P 500 sell-off.

Also, President Trump signed Hong Kong’s pro-democracy bill, which complicated the situation with China. Read Trade Talks: Will Hong Kong Endanger Negotiations? to learn more. Today, CNBC reported that China won’t consider the US “military ship and aircraft” visit request to Hong Kong. China blocked US navy ships from entering Hong Kong after pro-democracy protests. China might retaliate more in response to The Hong Kong Human Rights and Democracy Act of 2019. The US supporting Hong Kong protestors adds to the friction between the world’s two largest economies.

This week, President Trump’s address to NATO leaders will also be important for US-China diplomatic relationships. CNBC already reported that the US is concerned about China’s growing influence.

S&P 500’s earnings

According to a FactSet report, the S&P 500 Index’s “blended earnings” fell 2.2% in the third quarter compared to the previous year. The data are up to November 22. However, if the same trend continues in the remaining companies’ earnings results, it would be the third quarter of an earnings contraction—the longest streak since the second quarter of 2016.

Investors might be concerned about the sustainability of the recent rise in the equity market. Last week, the S&P’s trailing PE ratio was at 22.4x—compared to a 15-year average of 17.5x.

CBOE Volatility Index

Last week, the CBOE Volatility Index, a measure of the S&P 500 Index’s implied volatility, fell to the lowest level in more than a year. In the past, the declines in the volatility index coincided with the equity market’s rise. Any upside in the volatility could be a problem for the S&P 500.

In August, the CBOE Volatility Index was at the highest level in 2019. We saw a sharp correction in the equity market. Read Will Cyclical Stocks Rally in September? to learn more.

Similarly, the CBOE Volatility Index witnessed a large swing in December 2018. We already discussed the S&P 500’s decline. The same uncertainty around trade policy dragged the equity market.

Gold versus the S&P 500

In the last year, the correlation between gold and the S&P 500 was at -25.2%. Usually, these two asset classes move inversely. Last month, active gold futures fell 3% and underperformed the equity market. However, if the pessimism around the trade talks rises, we might see an upturn in gold prices.

Moving averages

On November 29, the S&P 500 closed 3.8%, 7.4%, and 5.1% above the 50, 100, and 200 DMA (day moving average), respectively. The S&P closed just 1.3% above the 20-DMA. At around the 3,100 level, the 20-DMA is an important support zone for the index.

If the S&P breaks below the 20-DMA, we could see short-term weakness. On the upside, the index might test the 3,200 level— a new record high. To learn more about other equity indexes, read Dow Jones: November Was Its Best Month since June.