Now that 2019 has turned into 2020, it’s important to reflect on the great stock market gains of 2019. It is even more important to try to figure out where the markets will be heading in 2020, now that the bull market is well over 10 years old and stocks are at all-time highs. The Dow Jones industrial average rose by 22.3% to 28,538.44 last year, after closing 2018 at just 23,327.46. The S&P 500 closed out 2019 at 3,230.78, for a 28.9% gain from the 2,506.85 end of 2018, and the tech-heavy Nasdaq Composite Index rose by 35.2% to 8,972.60 from the 6,635.28 close of 2018. To say the market was up huge would be an incredible understatement, but now is the time to look ahead and see how much, or if, those late-2019 gains robbed some or all the stock market’s upside for 2020.

24/7 Wall St. uses the end of each year and start of the new year to create forecasts for the year ahead. The 2019 Dow target of 28,000 was surpassed by more than 500 points, and at the start of 2019 sentiment was so bad that it was very difficult to believe the numbers. The start of 2019 adequately proved that the fears in late 2018 were overblown and then some. At the end of the day, using a model can shake off all off the noise of the present moment and give investors more insight into deciding whether its time to buy more, sell or just hold. That model continued to hold true even as the media was incorrectly predicting the dawn of a new recession in the summer of 2018.

As for 2020, there are some new risks at the same time that some of the risks of yesteryear are abating. Tensions with Iran and in the Middle East are coming at the same time that North Korea has become more vocal and antagonistic again. What is going on for the markets and the economy is that China trade tensions are lower, and China just introduced new unexpected stimulus. Europe appears to be avoiding a recession, the 3.5% unemployment rate is incredibly low, interest rates are expected to remain somewhat steady and inflation is expected to remain at or under the Federal Reserve’s 2% baseline target.

It turns out that the end of 2019 was the polar opposite of the start of 2019. The markets entered 2020 nearly in a state of euphoria after such strong year-end gains. The good news is that the model we have used year in and year out is again calling for gains in stocks. The bad news, albeit with some obvious wild cards, is that the market gains look much more tempered for what to expect from the Dow and S&P indexes in 2020. As of the first day of 2019, the average expected gain from Refinitiv’s consensus analyst targets of the 30 Dow stocks was a total return of about 7.4%. Of those projected gains, an average dividend yield of 2.6% implied that most stocks would rise only about 5%, without factoring in those dividend gains.

24/7 Wall St. always reminds readers that trusting a single analyst call, particularly when it comes to the most bullish or most bearish calls, is often not the right move for investors. What is of value is the so-called consensus because this aims to smooth out the good and bad, and it looks through the noise, hypes and concerns that may be present today by offering a one-year outlook. The “bull versus bear review” title also implies that there can be downside as well as upside.

One simple factor about not assuming that all of 2020’s potential gains were eaten up with a strong year-end gain in 2019 would be that the gains were far less if you went back to compare the 2019 year-end prices against the prior highs from before the fourth quarter of 2018. The S&P 500 index closed out 2019 only about 10.2% from that prior 2018 peak before the panic set in. Now the market is not seeming to be all that crazy after all.

Despite the bull market lasting so long, and despite the economic recovery being the longest of our lives, we have to look back at the entire move from before and after the Great Recession for some better reflection. 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 past decade. The Dow previously peaked at 14,000 back in late 2007, ahead of the Great recession, a level that was not recaptured until early in 2013. Looking at that metric, the Dow would be up “only” about 100% on a combined 13-plus year period, less than 8% per year and barely 6% on a cumulative recurring basis.

Before getting into a sector by sector review of the Dow and creating a forecast of less than 8% on a total return basis for 2020, let’s consider some wild cards. Energy has lagged and is now under secular threats from the so-called ESG (environmental, social and governance) investing. Financials may have gone too far ahead of themselves at the end of 2019. Boeing Co. (NYSE: BA), which has been the most important Dow stock by weighting (due to the Dow’s sole share price-weighting methodology) has been a huge lag and could go either way in 2020. Health care remains a top hot-button for politicians in a 2020 election year, and that could impact three Dow components directly. There are also some key restructurings that may even change the components that make up the Dow in 2020.

Even some slight surprises to the upside from four or five select stocks 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. Still, if there are upside surprises from the four or five top Dow stocks, it could more than offset the entire influence of the bottom half of the index. Here is a review and preview of how the model for Dow Jones industrial average could point to a baseline expectation of 7.4% gains to 30,650 in 2020.

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