Why the Dow Jones Could Hit 30,000 in 2020
2019 was a great time to be long on stocks, even with all of the trade-war noise.
Just when we thought a U.S.-China trade deal was within grasp, it slipped away. The action on the stock market was a barometer of the headlines: positive trade news led stocks to surge; negative tweets led to the opposite.
But we did manage to see record moves in 2019 by the Nasdaq, S&P 500, and Dow Jones Industrial Average. After a down year in 2018, the S&P 500 and the overall stock market recorded their best results since 2013.
Phase one of the U.S.-China trade deal is expected to be signed soon, albeit we never know what could happen.
Even if phase one is signed, the really tough negotiations are on the horizon with phase two. Based on what we witnessed over the past two years, the battle between the world’s two biggest economies may continue until after the U.S. presidential election in November.
Given this situation, the stock market will likely continue to trade on the headlines and remain volatile in 2020.
The superlative gains in 2019 are likely not be replicated, but the stock market could return some decent gains under certain circumstances. For the stock market to extend its gains this late in the business cycle, we will likely need to see a resolution to the U.S.-China trade situation.
Moreover, the global economy must not contract, and the earnings softness experienced in 2019 must reverse.
Stronger expected earnings growth will provide a catalyst for the stock market to move higher in 2020.
The Organisation for Economic Co-operation and Development (OECD) estimates that the U.S. economy could grow by two percent in 2020 and 2021. This would be decent, given that the idea of a pending recession has surfaced. (Source: “GDP Long-Term Forecast,” Organisation for Economic Co-operation and Development, last accessed January 6, 2020.)
China is predicted to see its gross domestic product (GDP) growth break below the six-percent threshold to 5.7% in 2020, followed by 5.5% in 2021.
While a truce between the U.S. and China is front and center, watch for the trade rhetoric to expand to France and Germany.
Low Interest Rates Add Support
Unless the global economy surges, we could be in for an extended period of low interest rates, and this is generally bullish for the stock market.
After three rate cuts in 2019, the Federal Reserve signaled at the Federal Open Market Committee (FOMC) meeting in December that it will likely maintain its policy of low interest rates in 2020.
Outlook Looks Bullish for 2020 but Outcomes Could Vary
My initial assessment for 2020 is that we will not see a repeat performance by the stock market. Stock-market multiples are already above their historic average, so there is little room for expansion unless companies’ earnings accelerate.
I would not be at all surprised to see a market correction, given that we have not seen a five-percent adjustment since the sell-off in December 2018.
My view is that a correction would attract a big capital inflow, since there’s currently plenty of cash on the sidelines.
Chart courtesy of StockCharts.com
The S&P 500’s actual earnings per share (EPS) grew by a muted 0.8% in 2019, according to FactSet. (Source: “Will the S&P 500 Report Record-High EPS in 2020?,” FactSet, December 11, 2019.)
But with the possibility of a U.S.-China trade deal, there is optimism in 2020 that could support a stock market gain. FactSet has suggested that the S&P 500 will see EPS growth of 9.7% in 2020, to an estimated $178.57.
Depending on the multiple assigned, the S&P 500 could vary widely. For example, the S&P 500 currently trades around 19 times earnings. In a bullish stock market, that multiple will tend to be higher than average.
Based on a multiple of 20 times, and the 2020 EPS estimate of $178.57, this year’s target for the S&P 500 is around 3,571, representing a 10.7% rise from the 3,226 recorded on December 23, 2019.
But if I used a lower—and perhaps more reasonable multiple of 19 times—the S&P 500 would target 3,393, up 5.2% from the December 23 level.
The following table shows my initial 2020 targets for the Nasdaq, Dow, S&P 500, and Russell 2000 (as of December 23, 2019).
|Nasdaq||Dow Jones||S&P 500||Russell 2000|
Of course, the numbers could become quite different as we move along.
My immediate 2020 target for the Nasdaq is 9,500.
The Dow Jones will depend on the global environment as far as tariffs and growth go. Economic renewal and easing of tariffs could easily see the Dow target 30,000 in 2020.
Technology stocks will likely generate the top gains if the S&P 500 moves higher. As mentioned earlier, my 2020 target for the S&P 500 is 3,393.
Small-cap performance will be contingent on how well the economy fares. My target for the Russell 2000 in 2020 is 1,750.