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Bull Market Risks & Opportunities From 2019 Into 2020: Apple, Microsoft, Amazon, Boeing, IBM, Exxon and More

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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.

Microsoft Corp. (NASDAQ: MSFT) was the next biggest gainer in the Dow with a 55% gain in 2019, and many expect Microsoft to prevail over Amazon.com Inc. (NASDAQ: AMZN) in the $10 billion JEDI cloud contract. Microsoft continues to seep upside from Azure and its online Office and other offerings. And while Amazon is not a Dow stock, Jeff Bezos stock was very flat for most of 2019 until the final week after it released record-breaking online sales from it and third party sellers. Its 23% gain in 2019 would have been just 18% had the Christmas and Holiday Season sales news been a non-event, and it is currently well off its highs and still has a $917 billion or so market cap.

Analysts currently see more upside in Amazon than Microsoft in 2019, but the solid performance of Microsoft and underperformance of Amazon may have skewed expectations that might see analysts make changes in the first weeks of 2020.

Apple and Microsoft alone have a combined market cap of close to $2.5 trillion at this point, with $1.3 trillion being Apple and almost $1.2 trillion for Microsoft. Apple and Microsoft alone accounted for 15% of the gains of the entire S&P 500 and accounted for roughly 1,300 points of the Dow’s 5,200 point gain.

Can Boeing Get Its Wings Back (and Rejoin the Bull Market)

Boeing Co. (NYSE: BA) was a huge disappointment after the two deadly 737 Max crashes grounded the entire fleet of that plane to where the problems are still not solved. Boeing even finally capitulated and sent its CEO Dennis Muilenburg walking (resigned, or whatever). With global geopolitics still hot (Iraq, Syria, North Korea just to name a few) and with a weapons and defense race as tensions with China and Russia remain elevated, there do still appear to be at least some undervalued defense stocks for 2020. After all of that, Boeing’s total return was still 1% in 2019. That’s impressive considering that it is down 27% from a peak of about $446.00.

Until the 737 Max grounding has a path of resolution to re-certification and rekindled interest, we won’t even bother with the consensus price target of $366.40 and expected upside in this review. At Boeing’s peak earlier in 2019 and before the selling pressure, its shares had risen 270% from early 2016.

Will the Dow’s Top 2019 Losers See an Upside Recovery in 2020?

Walgreens Booots Alliance Inc. (NASDAQ: WBA) closed out the year with a 13.7% loss, but a gain of 15% to 20% from its lows kept it from being far worse. After closing out at nearly $59.00 at year-end, the consensus target price was actually still down at $57.11 so the analyst community may ratchet targets up or the shares may just be trading more than what Wall Street really sees as a fair value.

Pfizer Inc. (NYSE: PFE) closed out 2019 with a return of −10.2%, but at $39.18 its consensus analyst target price of $41.91 from Refinitiv would imply a total return expectation of about 10.9% for 2020. Pfizer has key data and reviews for colorectal cancer, Alzheimer’s and other issues. Pfizer’s implied upside in 2020 might have looked better if the shares had not gained more than 10.5% in the fourth quarter.

3M Co. (NYSE: MMM) may have seen fourth-quarter gains of over 11%, but 3M shares closed out 2019 with a very disappointing −7.4% total return. Will trade tensions easing help 3M’s China sales, or will management be able to get to the bottom of its ongoing margin erosion issues? And can 3M get its investors away from the unusual environmental situation the company is now in.

Because the performance has suffered on top of already high dividends, all three of the Dow’s big losers (Walgreens, Pfizer, 3M) are confirmed in the Dogs of the Dow we previewed in December.

Can Big Blue Get Back on Track (and Maybe a New CEO?)

International Business Machines Corp. (NYSE: IBM) may have managed to post a 17.9% total return in 2019 after adding in dividends, but at $134.04 it is hopelessly caught in a very narrow and unimpressive trading range of $132 to $136 for most of the last three months. IBM spent up for Red Hat in a move that has not yet unlocked that growth driver for investors. One issue to consider is that CEO Ginni Rometty just has not delivered gains for IBM investors. She assumed the CEO role in January of 2012, and during this time of great economic expansion and technology’s exponential rise from the new tech titans, IBM shares have come down from closer to $200.00.

IBM just simply cannot replace all of its core IT-services revenue losses from the gains in the strategic imperatives of the business. That includes Red Hat and from the cloud, machine learning and artificial intelligence (Watson and beyond), as well as security, analytics and so on.

So with a great economy and with all the focus elsewhere in technology, about the only good news for IBM investors is that analysts have an average target of $148.30 as its shares have been so unimpressive. That and the 4.9% dividend yield would imply a projected total return opportunity of 15.5% if the analyst estimates are correct. Analysts are expecting a mere 3% revenue gain in 2020, but that would be expected to translate to earnings growth of 4% to $13.31 in earnings per share.

IBM still screens as a cheap stock at 10-times expected 2020 earnings, but that “look at the value” logic has generated losses over the past eight years while the market and competitors have seen their prices rise endlessly.

The Dow Could See Continued Restructuring of Its 30 Components

While it would be easy to jump around, mergers and reorganizations are going to come with questions about Dow Inc. (NYSE: DOW) and United Technologies Corp. (NYSE: UTX). What if Walgreens does manage to get its go-private offer that had been rumored earlier in the fourth quarter? That is three Dow stocks that are witnessing structural (or would-be structural) changes.

As the Dow uses an antiquated price-weighting rather than market cap weighting, the top three stocks (Boeing, UnitedHealth, Apple) account for a whopping 21.75% of the entire 30 stocks. The bottom 10 stocks account for only about 15% of the entire Dow’s weighting. Any stock split announcements of the top Dow components would also skew how the index is weighted.

Energy Keeps Disappointing Investors, and ESG Is Only Growing

Energy is a sector that has been a great laggard. Many investors just don’t want to own oil and gas stocks. That’s the reason that it doesn’t matter if they are worth just 8 or 10 times earnings. If fewer and fewer investors are willing to buy the shares, and if a growing pool of investors will not invest in their shares at any price, there is no reason they cannot trade down to 5 times earnings without any fundamental changes in the market or the economy.

Chevron Corp. (NYSE: CVX) managed a 10% gain that exceeded the mere 2.3% gain from larger rival Exxon Mobil Corp. (NYSE: XOM). Both energy giants are Dow components, but Exxon’s year-end price of $69.78 comes with roughly a 5% dividend yield. The consensus analyst target price of $78.47 would imply a total return opportunity of about 17.5%, but Merrill Lynch sees close to 50% in implied upside in 2020 to its price objective. Chevron is also expected to see upside of about 17.3% in 2020 if the consensus analyst target price comes to pass.

Perhaps the good news here is that Exxon and Chevron, with their lower share prices, represent a mere 4.5% combined weighting of the Dow. That means that, even if they cannot rise as much as analysts are hoping for, the so-called energy drag might be minimal if the stocks with larger weighting perform well.

Can Financials Hold Up in 2020?

There is an old saying that for the stock market to rise you have to see participation from the financial sector. It makes sense if you consider that a strong market and a good economy would boost the overall perceived value of money and finance. JPMorgan Chase & Co. (NYSE: JPM) is the king of banks and financials with close to a $450 billion market cap and what is still believed to have the safest credit profile customer base of all major banks. After close to a 43% gain in 2019, it may seem unsurprising that analysts have a consensus target price that is nearly 8% lower (pre-dividend) than the year-end price of $139.40.

Stay tuned for our formal year-ahead projections for 2020.

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