The S&P 500 index (^GSPC) is surfing at and around an all-time high as the pandemic’s light at the end of the tunnel emerges thanks to vaccines, despite serious woes in the labor market.
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All the news about vaccines and stimulus plans is priced into the market, says George Ball, CEO of financial services firm Sanders Morris Harris. So what’s next?
“The market is gasping and grasping for some new leadership signal,” Ball told Yahoo Finance Live. “I think the next move, especially if you’re a trader, is probably greed, and there is a greed catalyst out there that is very influential.”
What exactly is a greed catalyst? On the one hand, Ball said that the market might see another 10% to 20% move higher over the next few months as bullishness intensifies.
But there’s another, more present catalyst Ball says is underrated. "I'm actually talking — I don't actually do this — about the shorter-term element," he said. “It is the Wall Street trader who gets paid his or her bonus based on the results at year-end."
Throughout history, he said, if the market was at a high point at the end of November, it continued rising further through the end of December 75% of the time.
"Part of that you can say is the Santa Claus rally," he said, referring to a commonly held belief that investors are irrationally bullish in December. But "on Wall Street people that get paid a percentage of the profits that they make, generally at the end of the year, will often buy more of the same stocks or bonds in the month of December.”
Those purchases are an effort to drive the market higher “to protect that bonus element,” Ball added.
In his view, there’s nothing nefarious about this, because it’s just traders buying stuff they already like.
This bias that Wall Street might have for high year-end prices may not lead to a huge 20% bump on its own, but combined with other factors, could result in a further surge in the market.
Three big factors moving forward that aren’t priced in
Ball said there are three of these catalysts that aren't priced into the market yet.
The first is infrastructure. This has long been a topic of some bipartisan agreement, and Ball sees a big infrastructure spending initiative as something with a good chance of happening that would be “a major economic stimulus for the markets.”
The second factor Ball admits is intangible: the message of unity from Biden, which he says is good for stocks. “Unification is good for psychology. Look back to the President Reagan era where he made people feel good,” said Ball.
The third factor is the rise of the retail trader, the "younger do-it-yourselfers, the Robinhood traders are discovering individual equities," said Ball. Already, this cohort has been trading since the coronavirus crash in March, but with all the new players in the market Ball sees knock-on effects as they continue their journeys in the market.
This interest in stocks, he said, is largely positive and on the bull side. These are "three big plusses that aren't priced into the market that can easily push the S&P 500 over 4,000 some time before midyear of next year."
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Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.
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