bull

– Strong equity return years—like 2019’s near 30%—often followed by good years – Another double-digit equity return expected, fueled by improving world growth – Tech, financials, materials, energy and industrial sector stocks should benefit Raise a glass if you have one handy —get one if you don’t—with just a few trading days left in 2019, the year will likely finish up as one of the best of the decade for U.S. equity investors, with a total return near 30%, as of Dec. 24. This is all the more remarkable since the 2010-2019 decade itself has been a robust one for stocks, too, up 182%, fourth best decade since 1900, according to Bespoke Investment Group data. Source: FSInsight, Bloomberg It’s the time of year when some pull out their crystal balls, but we use data here as well as history and good old-fashioned analysis. In 2020, I’m looking for the old bull to continue its yearend move to a nice canter from a leisurely trot, with the stock market rising at least 10%, as the EPS of the companies in the Standard & Poor’s 500 index (SPX) increase about the same percentage or perhaps better. SPX EPS should finish around $163 this year and estimates are for $178 in 2020. Indeed, while in 2019 the market’s price/earnings multiple carried the bull almost entirely—rising more than 25% to 18 times from less than 15 times on little or no earnings improvement—the market will have to produce the earnings growth that is expected of it, 10%, for the bull to continue rallying in 2020. It’s possible I’m underestimating the reviving “Animal Spirits,” which my colleague Tom Lee has alluded to in his recent “2020 Strategy Outlook: Reviving Animal Spirits,” Dec. 19. He has a base case SPX target of 3,450 based—versus about 3,235 currently—with a 17.9 price/earnings (P/E) multiple on estimated EPS of $193 in 2021.  That’s a number the market will be discounting 12 months from now.  While an 18 forward multiple is  higher than the 15 long term average, it’s interesting to note that this entire bull market’s (trailing) P/E has risen 50% from 2009, not atypical for bulls.  Valuations look particularly reasonable compared to bond yields below 2%. Let’s line up the various positives that undergird my call. The house forecast is for the global economy to pick up steam in 2020 from a languid 2019, and that should help SPX earnings grow. Purchasing Manager Indexes should recover and the easing trade tensions between the U.S. and China will support stocks. Meanwhile, China itself is showing signs of economic reacceleration. Additionally, earnings growth will likely get a boost from an improving inventory cycle, at a multi-year low. The Federal Reserve, a strong headwind in 2018, turned into a tailwind in 2019 when it began to reduce the Fed funds interest rate, and it should continue that way in 2020.  Unless the economy and inflation really ramp up, unlikely I think, the Fed has said it will remain on the sidelines next year, a plus. There will be potential easing of monetary conditions in Japan and Europe and all this could add 0.5% per quarter to U.S. gross domestic product, again benefiting profits growth. Perhaps the market is already discounting this, as in Q4 stocks of companies in the SPX with the most international revenue exposure have begun to significantly outperform those companies with mostly domestic sales.  By the way, materials and technology, sectors we think should benefit in 2020, have the most overseas sales. And what about those “animal spirits”? Until recently, this was a hated bull market, which ironically helped support it.  Finally, investor confidence, both institutional and individual, appears to be gaining, though we remain a long way from love or euphoria. I think that FOMO (fear of missing out) is just beginning to take hold and momentum is rising. This can last a while.  According to a recent Bank of America Merrill Survey, there has been a pronounced flip in fund manager expectations about the economy to a net +6% from -37% a month ago. This type and size change is unusual, particularly after extended negative readings. Similar past moves have only been seen at inflection points (to positive) in equity markets, such as 1998, 2002 and 2009.  Source: FSInsight, Factset  Individual investors, who have never really bought into this bull, seem to be getting more interested. According to , there were “impressive” ETF inflows of nearly $52 billion for the week ended Thursday, Dec. 19—the largest weekly inflow on record. Much of that went to equities. The year-to-date total is $342 billion, higher than the year ago inflows ($305 billion).  How different the picture is today from 12 months ago, when the market was coming apart at the seams, hitting an intraday bear market on Dec. 24, 2018. What about earnings? The nearby chart shows what industry analysts are projecting.  The energy sector, which we favor, is expected to report the highest EPS  growth, 21%, according to FactSet.  Industrials, another sector we like, is expected to report the second highest, 14.8%.  Additionally, SPX firms with more international sales exposure are expected to report higher earnings, 13.8%, relative to those with less, 7.6%. Many stocks are underperforming, even if they are up a lot.  The average SPX stock is up 26%, less than the index. Tech is up nearly 50%, but much of it is from Microsoft (MSFT) and Apple (AAPL), and there are even tech stocks that have underperformed.  Besides energy and industrials, we are recommending financials, materials and technology, for the long term.  While the U.S. is an overweight, by style cyclical and value stocks—which are more plentiful in Europe and China—are also expected to do better in 2020. Wall Street strategist surveys, a modestly good contrarian indicator, show a mean expectation of a 4% rise in 2020. Since 1928, nearly 80% of returns were higher than 10% or worse than -4%, so you should always be asking what might trigger the next big move, in either direction, says the Dow Theory Forecasts newsletter. Meanwhile, the NYSE Advance/Decline line is also at an all-time high and this often leads the market price by four to six months. Over the years, the odds are 85% that the market will be up after a double-digit return, points out Wellington Shields.  Indeed. A Happy New Year wish to all our clients and members. Where I could be wrong:  In terms of known knowns, the impeachment politics could turn uglier, or a radical leftist Democratic presidential candidate wins the presidency next November. Or the economic data somehow doesn’t improve, contrary to our expectations, EPS doesn’t grow and the recessionary boogeyman returns. Bottom Line:  2020 should provide a strong, double-digit return for equities. 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