2020 Bull/Bear Outlook Sees the Dow Rising to 30,650 Before Year-End

Energy, particularly within oil and gas, keeps disappointing and acts as a huge lag for index investors. The move into ESG is only growing, and many investors either do not want to or have become exclusively against owning oil and gas stocks, or anything with deep ties to carbon and pollution. It almost no longer matters if oil and gas stocks are worth just eight or 10 times earnings. If a growing pool of investors will not invest in their at any price, there is no reason they cannot trade down to five times earnings, even if no other fundamental changes are seen in the market or the economy.

Chevron Corp. (NYSE: CVX) managed to beat many oil and gas stocks with a 10% gain in 2019, but the mere 2.3% gain from larger rival Exxon Mobil Corp. (NYSE: XOM) was only positive because of its high dividend yield. Exxon’s year-end price of $69.78 comes with roughly a 5% dividend yield. The consensus 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 target price comes to pass. That said, there was some disappointment and concern that Exxon’s year-end update in the first two trading days of 2020 was acting as a potential guiding down of its earnings.

Most investors assume that for the stock market to rise there must be a strong participation from the financial sector. After all, a strong stock market and a good economy should boost the overall perceived value of money and finance. When it comes to JPMorgan Chase & Co. (NYSE: JPM), the defacto leader of the money center banks with close to a $450 billion market cap and the safest credit profile, analysts are concerned that its 43% gain in 2019 may have eaten into 2020’s upside. The consensus target price showed that analysts believe JPMorgan was nearly 8% overvalued at the start of 2020.

The often overlooked Dow stock of Travelers Companies Inc. (NYSE: TRV) showed only a 14.3% gain in 2019, and expectation of not even 6% for 2020. Goldman Sachs Group Inc. (NYSE: GS) recovered from much of its panic selling lows, but it’s 37.6% return in 2019 was followed with an expected return of just 8.6% for 2020. American Express Co. (NYSE: AXP) was up just over 30% in 2019, but it has an unexciting 1.4% dividend yield and analysts are looking for just 7.3% upside on average in 2020. Some analysts are calling for stronger participation by financials in 2020, but the start of the year was not showing that Wall Street was very enthusiastic about its own prospects this year.

Merck & Co. Inc. (NYSE: MRK) and UnitedHealth Group Inc. (NYSE: UNH) both face a potential binary event around the 2020 elections. The same is true for Pfizer, but Pfizer has a wild card of its own around a potential Alzheimer’s drug that remains questionable but still has perhaps the greatest chance of all major pharma companies to get the first mass-approval to treat the disease. UnitedHealth rose 18% in 2019, and the consensus was calling for another 7% gain in 2020. That seems hard to fathom if universal healthcare or “Medicare for All” becomes a reality.

Merck shares the risk of price controls along with Pfizer, although Pfizer seems to have stood out as the Big Pharma player with the biggest drug price hikes at the start of 2020. Johnson & Johnson (NYSE: JNJ) has risks tied to the opioid epidemic and to ongoing talcum powder cases, although these may be ongoing issues for years.

The Dow may see a continued “evolution” with some restructuring efforts within 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). And what if Walgreens does manage to get the go-private offer that had been rumored in the fourth quarter? That would make three of the 30 Dow stocks witnessing structural (or would-be structural) changes, and it’s impossible to know how the index treatment will be handled. Will they remain or will they be replaced?

There are four more important Dow stocks worth considering as well. Verizon Communications Inc. (NYSE: VZ) stands out with a 4% dividend yield, but Wall Street’s consensus of a 4.6% implied total return implies that almost all the 2020 gains will be from its dividend. What if Verizon switches places with AT&T and gets anywhere close to AT&T’s 37% gains seen in 2019 that was unexpected a year ago. Walt Disney Co. (NYSE: DIS) was seen generating a gain of 9.3% in 2020, with the combined media and Disney+ efforts, and that’s after a near 32% gain in 2019. Nike Inc. (NYSE: NKE) managed to gain over 36% in 2019, even with a low dividend yield of 1%, and Wall Street sees gains above 8% on average, with some calling for upside of 15% or more. Caterpillar Inc. (NYSE: CAT) managed to rise by 16.2% in 2019 despite all of the woes with China and other emerging markets, but Wall Street could be way behind the curve with a projected 0.9% return in 2020 if things continue to improve for it.

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