What better start to the New Year than with new highs? Already on the first trading day of 2020, we’re seeing fresh 52-week highs for the S&P 500, Dow and Nasdaq. And on Tuesday, investors popped champagne to close out 2019 on quite a high note, too: Those indexes gained 29%, 23% and 35%, respectively, for the year.
Now, you might be wondering: Do I expect this bull market – the longest on record – to continue in 2020? Absolutely! Two key sources of geopolitical uncertainty are being removed, and the earnings outlook is getting brighter (as I’ll talk about in just a moment). That was the basis of the bold prediction I made a few weeks ago: I think the Dow could very well reach 40,000 this year!
Even when investors were at their most fearful in 2019, there was one key factor driving demand for stocks: interest rates. As long as central banks keep rates low (or negative, in some cases!) to “juice” their respective economies, the dividend stocks in the Dow remain attractive. Right now, they’re yielding 2.64% on average…and the 10-year U.S. Treasury is still sitting down at 1.92%. So, the Dow can gain roughly 50% before it would match the 10-year.
You’ve also got to remember that the United States is a consumer economy – and consumers certainly are spending. Shoppers kicked off the holiday season by spending $31.2 billion on Black Friday and another $19.1 billion on Cyber Monday. Then December 21, or Super Saturday, set a record as the biggest shopping day ever, with $34.4 billion in sales!
Taking a broader view of consumer spending, 3% annual GDP growth is likely in 2020. This alone is enough to keep capital flowing into U.S. stocks. That’s particularly true of the high-quality names in my Platinum Growth Model Portfolio. (I’m adding seven more stocks to my Model Portfolio in today’s January Monthly Issue, which will be available after the market close. You can find out the names here.)
And then there’s the two previous distractions – the U.S.-China trade war and Brexit – which I expect to be a non-issue in 2020.
As you may know, the U.S. and China are planning to sign a Phase One trade deal on Jan. 15. While all of the terms of the Phase One trade deal haven’t been revealed yet, there are a few things that we do know right now.
First, the Trump administration canceled the new tariffs on another $160 billion worth of Chinese goods, which were scheduled to be implemented on Sunday, December 15. The U.S. also plans to reduce the 15% tariff on $120 billion worth of Chinese imports down to 7.5%. The 25% tariff on $250 billion worth of Chinese goods remains in place for now, and will likely be used as leverage in future negotiations with China.
U.S. trade negotiators also noted that China had committed to purchasing at least $32 billion more in U.S. agricultural products in the next two years. That would bring China’s total U.S. agricultural purchases to nearly $50 billion each year.
With trade tensions between the U.S. and China now ebbing, the financial media is really struggling to find something to make investors worry. In fact, the financial media can’t even use the Brexit drama as a sticking point anymore, and the reason why is simple: The results of the U.K. election.
Prime Minister Boris Johnson had a landslide victory in the U.K. election on Dec. 12, which gave his Tory party a big majority, with 365 seats in Parliament. What this means is that Brexit will likely happen on January 31.
Now that the political crisis is finally over in the U.K., we’re starting to see some Brexit “push back” emanating from the European Union (EU). As an example, French President Emmanuel Macron recently warned that Britain could become a formidable rival and “unfair competitor.” And German Chancellor Angela Merkel warned that Britain would be an economic “competitor at our door” after it leaves the EU. The concern is that Britain could become a trading hub where multinational companies can gain access to the EU’s huge market without playing by its rules.
That would certainly be bullish for the British economy; we’ll just have to see how that plays out to get a clearer picture. In the meantime, we’re already starting to see just how strong the U.S. economy is poised to become in the coming months.
Why I Expect Earnings to Support Another Record Year
It’s been awhile since we’ve really had a barn-burner of an earnings season, on the whole. And that’s likely to be true for a few more weeks yet:
Fourth-quarter earnings and sales are still expected to be lackluster for the S&P 500 due to more difficult year-over-year comparisons. According to FactSet, the S&P 500’s earnings are expected to decline 1.3% in the fourth quarter and revenue is forecast to grow 2.5%.
However, that “earnings recession” we’ve repeatedly dealt with in 2019 looks to become a non-issue, too.
I expect that many companies – particularly the ones I recommend for Platinum Growth — will issue positive guidance for 2020. This is mainly because year-over-year comparisons will be much more favorable, and the economic outlook is especially promising without any interest rate uncertainty. In fact, FactSet also recently noted that earnings should grow between 5% and 7% in the first six months of 2020.
These days, you’re not going to get that kind of growth many places outside the United States. And you’re certainly not going to get that from bonds.
Yet money has to go somewhere…and, in my experience, it tends to find its way into the best companies the market has to offer. Along the way to Dow 40,000, I expect my Portfolio Grader system to keep us on track for stellar growth in the year ahead.