The Year of the Dragon usually promises a tapestry of prosperity and strength for the U.S. stock market, suggesting the recent rally that has brought the S&P 500 to the 5,000-point level may still have room to run, according to Tom Lee, an equity bull and head of research at Fundstrat Global Advisors.
U.S. equities have done “particularly well” during the Dragon years since 1871, gaining an average of 12.7% for the year, Lee said in a research note shared with MarketWatch on Friday. That also suggests the S&P 500
SPX
could rise as high as 5,350 points by the end of 2024, implying a 6.4% advance from its closing level of 5,026.61 points on Friday, Lee said.
In 2024, the Lunar New Year starts on Saturday, Feb. 10, marking the beginning of the Year of the Dragon.
“Dragon is pronounced ‘long’ in Chinese, and actually, the Year of the Dragon lives up to its reputation,” Lee wrote, adding that the S&P 500 has finished Years of the Dragon higher 75% of the time (see chart below).
Small-caps stocks also usually shine in Years of the Dragon, with the iShares Russell 2000 ETF
IWM
outperforming the S&P 500 88% of the time dating back to 1979, Lee said.
The price-to-book (P/B) ratio of the Russell 2000 index
RUT,
currently trading at 1.91, is only 45% of the P/B ratio for the S&P 500, now at around 4.19, according to FactSet data. The divergence between the P/B ratios of two benchmark indexes is the same as in 1999, when the small-cap index started outpacing the large-cap S&P 500 for the following 12 years, Lee noted.
See: Magnificent Seven stocks have soared, but historically it’s been ‘lucrative’ to bet against the biggest stocks
Small-cap stocks could also benefit from investor inflows into equities, he said. “Roughly six weeks into 2024, we finally see investor inflows. Weekly inflows totaled $5.6 billion, partially reversing $25 billion of outflows so far. We expect investor inflows to turn positive in 2024, reversing two consecutive years of outflows,” Lee wrote on Friday.
Lee also foresees that positive inflows could broaden the stock-market rally beyond the so-called Magnificent Seven of megacap growth and technology companies. A broadening of the stock rally could make the case for “a stronger 2024” and possibly see the S&P 500 climb to “the upside” of a range of 5,400 to 5,500 by the end of the year, said Lee.
U.S. stocks finished mostly higher on Friday, with the S&P 500 scoring its 10th record close of 2024 and booking a fifth straight week of gains. The Dow Jones Industrial Average
DJIA
rose less than 0.1% for the week, and the Nasdaq Composite
COMP
surged 2.3% over the same period, according to Dow Jones Market data.
See: Chinese stocks showing signs of ‘capitulation’ as Wall Street analysts say bottom is in
Year of the Dragon usually gives gold demand a boost
MarketWatch reporter Myra P. Saefong wrote last week about how demand for gold from China usually surges during the Lunar New Year vacation season, which runs from Feb. 10 to 17 this year, and could help prices for bullion and gold-related products rise to a fresh record. The yellow metal is always considered a sign of good fortune in China and is commonly purchased as gifts for the holiday, especially in the Year of the Dragon.
The dragon holds a unique place in Chinese culture as the only mythical creature among the 12 zodiac animals, and it usually symbolizes strength, luck and prosperity.
See: Why gold prices are likely to reach a record high in 2024
Meanwhile, U.S. investors who want a dip in the gold price to start adding to their own bullion holdings “could well get an opportunity” when the Shanghai market shuts on Feb. 9 for China’s weeklong holidays, said Adrian Ash, director of research at BullionVault.
Looking further ahead, Ash said it’s hard to see gold prices falling too far this year. The bullion market is finding strong support above $2,000 from “relentless central-bank demand, spurred by today’s dreadful geopolitical tensions, plus China’s massive household demand, driven by its poor financial and economic outlook,” he told MarketWatch last week.
Gold futures
GC00,
GCJ24,
on Friday fell $9.20, or 0.5%, to settle at $2,038.70 an ounce on New York Mercantile Exchange. For the week, the yellow metal declined by 0.7%, according to Dow Jones Market Data.
— Myra P. Saefong contributed to this article
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