The year 2019 was nothing short of incredible. On top of the bull market now being well over 10 years old, the Dow Jones industrials, S&P 500 and Nasdaq all put in strong gains at the end of the year to close out very close to all-time highs. The Dow ended up at 28,538.44 for an annual gain of 22.3% from the 2018 close of 23,327.46. The S&P 500 closed out 2019 at 3,230.78 for a 28.9% gain from the 2,506.85 close-out of 2018. And the tech-heavy Nasdaq Composite Index closed at 8,972.60 for a 35.2% gain from the 6,635.28 closing level of 2018.
While it is easy to say the market was up huge, an incredible understatement, many are going to wonder about whether or not those big gains can hold and keep growing in 2020. It may be nice to look back at the gains of the last year, several years or decade, but it’s the look out into 2020 and beyond that will matter the most for any investor who is not yet in retirement.
24/7 Wall St. has created a review and preview of issues impacting 2019 and looking into 2020. Our formal 2020 DJIA forecast will be released shortly, and the outlook appears to be calling for another year of gains, but our original Dow 28,000 forecast for 2019 was reached and exceeded in mid-November.
What should temper the fear from investors about the market having risen too much in their outlook ahead, which is always seems to be a debate that can be made, is the very negative fourth quarter of 2018 was so atrocious and overblown that it greatly skewed the numbers. The markets got it wrong on stocks and wrong on interest rates. Investors were too obsessed about Jerome Powell and the Federal Reserve wanting to hike interest rates back up toward 3%. The trade war fears were brewing, earnings appeared to have peaked, business was slowing down, and the global growth was slowing enough that there ended up being more negative interest rate debt than can be fathomed.
This should put the 2019 gains, after the late-2018 market tank, in perspective: If you went back to the Q3/Q4 highs of 2018, the S&P 500 index actually only gained about 10.2% from that prior peak.
A strong decade is an understatement: With the bull market now over 10 years old, and with a new decade upon us, it’s important to see where stocks went during the longest-running post–World War II recovery on record. The Dow’s 28,538 close of 2019 was up from a low of about 7,500 from the peak selling wave of March 2009, but the Dow closed up over 170% for the last decade. The Dow peaked at 14,000 back in late 2007, before the Great recession, a level that was not recaptured until the start of 2013. Looking at that metric, the Dow is up “only” about 100% on a combined 13-plus year period. The tech-heavy Nasdaq closed out almost 300% higher over the last decade. That is of course skewed by the technology titans (see below). In the S&P 500, the gain over the last decade was about 190%. From the selling zenith of the 666 bottom on the S&P 500, the index was last seen up almost 400% from that classical V-bottom of March 2009.
Valuations may be stretched but not unreasonably: According to Refinitiv, the valuation of the S&P 500’s forward four-quarter period has an 18.9 P/E ratio. Over the past four quarters, 74% of companies beat estimates and 18% missed estimates on earnings and 59% of companies beat estimates and 41% missed estimates on revenues.
Dividends and interest rates will be important in 2020: It is important to consider where the state of Treasury yields and dividends are heading into 2020. The federal funds rate ended 2019 in a 1.50% to 1.75% target range. The yield on the 10-year Treasury was roughly 1.92%, down from 2.68% at the end of 2018. The Treasury’s 30-year “long bond” ended 2019 with a yield of roughly 2.39%, down from 3.02% at the end of 2018. Those yields were still considerably better than at the lows of the year (1.43% for the 10-year and 1.90% for the 30-year), but a drop of 76 basis points on the 10-year and a drop of 63 basis points on the 30-year at a time when stocks gained so much shows how wrong the over-caution in the markets was at the end of 2018. Most forecasters are expecting a flat to slightly changed interest rate environment in 2020. The CME FedWatch Tool at 2019’s year-end showed a 71.6% chance that the Fed Funds will not have moved off the 1.50% to 1.75% range even by the late-July 2020 FOMC meeting (and over 80% even in June).
Again, our formal Dow target used by the same model each year will be out the first week of 2020. We can say that the index gains are expected to be positive, but the mammoth gains from 2019 may have eaten into some of the upside that would have been likely been seen 2020’s. Then again, some even slight surprises to the upside from even four or five select stocks below could greatly bolster the expected upside ahead. How the election will play into this seems to be a very binary event for the markets, and we cannot ignore the risks from the ongoing major divide that is in the country at this time. Now is the time to glance into 2020.
Technology’s Leadership Cannot Be Ignored
Apple Inc. (NASDAQ: AAPL) led the Dow with a whopping 86% gain, and the current most optimistic analyst right now is still seeing 20% upside potential for Apple in 2020. Can the next iPhone release create that super-cycle of upgrades that analysts have been calling for? Also adding growth is the new Apple TV and the apps and services within its own ecosystem. Still, with such strong gains, Apple’s consensus analyst target price has just not caught up with the stock. If that consensus does not get ratcheted higher in January, which we would expect to see in a wave of target hikes (or a sell-off), then Apple’s projected return would be −8% in 2020. But if Apple can keep rising, that would actually add significantly to the overall expected Dow gains for 2020.
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