With Mario Draghi’s ECB threatening additional stimulus plans at the Jackson Hole stage last Friday, stock investors are pushing the envelope on valuation and have driven the S&P 500 index above 2,000 for the first time.
The basis for stronger equities is a combination of improving economic prospects resulting from future stimulus, underpinned by the powerful uplift of declining bond yields. European government bond yields are once again lower and helping drive up bond prices on this side of the Atlantic. Notably, the U.S. 10-year at 2.39% today stands 28bps lower than its average value over the past one-year. In part, the reason for resilient bond prices may be that investors are still digesting the Janet Yellen FOMC views on labor market progress as the recovery continues.
The drive to 2,000 for stocks matched the latest year-end predictions for three more Wall Street forecasters according to the Bloomberg consensus, which collectively projects a year-end average target of 2013 (Bank of America, Citigroup and HSBC). The range of forecasts covers 1,850 to 2,300 (Wells Fargo and Stifel Nicolaus). We thought it would be interesting to consider those extremities through the lens of the IB Probability Lab, not for this year, but for December 2015. We should point out that due to forecast dividends, the equivalent forward price implied by SPDR ETF is 1954. The chances of SPY closing below 1850 by the end of 2015 is shown as 32.3% according to current options pricing. Meanwhile, the odds of a close above 2,300 are just 10.4% according to prevailing options pricing.
Chart shows the probability profile for the December 2015 S&P 500.