Now that the strong gains have been seen in 2019, it’s time to look backward and forward to get an idea of what to expect for 2020. The stock market gains of 22.3% in the Dow Jones industrial average and 28.9% in the S&P 500 in 2019 were nothing short of spectacular. Many investors will worry that the strength at the end of 2019 will have eaten into potential upside that could have been seen in 2020. One issue that may put those fears to rest is that the S&P 500 index closed out 2019 only about 10.2% from that prior 2018 peak before the late-2018 panic selling took over. Now the stock market gains suddenly do not seem too crazy, and what seemed like an unbelievable Dow forecast of 28,000 in 2019 was reached and then some.
24/7 Wall St. has issued a Bull/Bear review for the stock market for the past decade. Our methodologies average out the Dow’s consensus price targets on each of the 30 components and add in dividends for an expected total return. While 2019 was grand, some things could have juiced up the returns even better than were seen last year. Since those did not come to pass, it’s quite possible that the disappointments and other leadership efforts could add to the expected baseline for 2020.
Our official 2020 baseline model was for the Dow to generate a total return of 7.4% and rise to roughly 30,650 over the course of the year. With interest rates expected to remain low, with a China trade pact waiting to be signed and with earnings growth and global growth potentially come back, there are a few issues that could easily make an expected 7.4% gain in the Dow look more like a gain of 10%, 12% or even higher.
Recall that the Dow is a price-weighted index. The index calculation is quite antiquated as it completely ignores market capitalization in the weighting. This means that the top six Dow stocks account for about 37.5% of the entire index, while the bottom third (10 stocks) account for not quite 15% of the entire weighting.
Including an upside scenario is not meant to override any downside scenarios. These positives could easily happen, but there are many negatives that could wipe away the smiles from the bulls on Wall Street. Iran and Middle East tensions could brew back into an escalation of troop deployments and ongoing conflict. A more vocal North Korea could become more antagonistic. The trade deal with China could prove to be a dud or backfire. Earnings growth and gross domestic product could disappoint. Global growth being rekindled also could falter. The populism of taxing wealth and assets is still not dead in the water, and the endless costs of free medical care for all and spending for the environment over growth and the economy could pose troubles. All that considered, there are still risks that have to be weighed.
24/7 Wall St. has reviewed the top six Dow components by weighting, as well as some additional components, that could take the Dow up by 10% to 12% rather than the baseline of just 7.4%. If that comes to pass, then the Dow’s rise to 30,650 could easily be up to a range of 31,350 to 32,000 before investors have to start seriously worrying that the market is back to being too far ahead of itself. Here is a rather simple path of how that would occur, and we have used index weightings from indexArb.com for the Dow and consensus analyst target prices are from Refinitiv.
Boeing Co. (NYSE: BA) has close to an 8% weighting in the Dow. While it barely posted a gain at all in 2019, it lost 27% of its value from the peak. After closing ending the year at $325.76, the year-end target price of $366.40 implied a total return expected of 15%. That likely will depend solely on Boeing’s 737 Max fleet status as 2020 matures. The CEO was axed, and the basic assumption is that the jet will be recertified sometime in 2020, after Boeing had to shutter production at the start of the year. If that occurs and no additional hiccups wreck its shares, Boeing’s stock target prices could easily climb back over $400 for close to a 25% total return.
Apple Inc. (NASDAQ: AAPL) was the Dow’s best performing stock in 2019. Its weighting is better than 7% at the start of 2020, and the year-end price of $293.65 already has seen its subpar consensus target price lifted during the first week of 2020. Most analysts at this time do not want to have “Sell” ratings on Apple, so the pool of analysts is likely to keep lifting the price targets. The most bullish analyst was from Wedbush Securities, with a $350 target price, but he has even offered up an outline that would get Apple up to $400 under the right circumstances: China trade, the iPhone supercycle from 5G in 2020, successful gains seen from Apple TV, apps and services. Even if the $350 level seems high, a 10% return would only require Apple to rise to about $320, a level that already has been passed by some more recent analyst calls.
UnitedHealth Group Inc. (NYSE: UNH) had a 6.8% Dow weighting at the end of 2019, and its $293.98 share price compared with a consensus target price of $310.32 and implied a gain of over 7%, after returns of 18% last year. If the health insurance industry loses the threat of Medicare for All and universal care for another four years, all of which is financially and mathematically challenged by reality, then suddenly investors will want to own even more of the nation’s largest corporate health insurer. At that point, a gain of 10% might seem too paltry and some investors might be thinking a gain of 15% or even 20% would not be outside of the realm of possibilities.