The stock market has gone into full on melt-up mode in December as investors cheer a cooling in the U.S.-China trade war and no indications from the Federal Reserve that rate hikes are in the cards early on in 2020.
Stocks are indeed in autopilot mode — investors have their blinders on with respect to anything that could dent equity prices. And so do most prominent strategists on Wall Street — countless big names have come out very bullish on equities for 2020 in their annual look ahead notes to clients.
The most level-headed forecast we have seen is out from the Goldman Sachs team. Goldman projects the S&P 500 to tack on another 6% in 2020, reaching 3,400.
But all that bullishness doesn’t mean there isn’t a growing undercurrent of concerns that puts the bull market at risk for less stellar gains next year. In fact, the market’s seemingly ignorant approach to stock evaluation right now heightens the risk for a first half 2020 correction as economic data is unlikely to snap-back in a a big way. Corporations continue to be hesitant to invest in capex amidst an unpredictable trade war and stock buybacks are less appealing for companies due to the higher valuations afforded shares.
Credit Suisse strategist Jonathan Golub — a long-time market bull — highlights several concerns currently on the minds of clients at the moment.
Concern #1: Unsustainable returns
Investors are correct in being concerned about stocks across many asset classes holding onto their epic 2019 gains. Just look at the outsized 141% and 72%, respective year-to-date gains in chip plays Advanced Micro Devices and Nvidia. Unless global growth goes into warp overdrive as corporations feel more confident on the trade war front, it’s hard to believe the gains in the chips are sustainable.
The same could be said — to a much less extent — about the nearly 30%-plus gains for the Nasdaq Composite and S&P 500 this year. Growth must pick up strongly by mid-2020, or the market is likely to give back a chunk of 2019’s gains.
Concern #2: Elevated valuations
Golub is quick to pour cold water on this investor concern.
“Given historically low interest rates and risk premiums, we believe valuations have further to run,” Golub says. Fair point. But at some moment in 2020, earnings will have to accelerate in order to justify Golub’s call for a push higher in stock valuations (a view similar to others on the Street). Whether that happens is a major wildcard sitting here today.
S&P 500 earnings growth is expected to be about 9.5% in 2020, according to FactSet, faster than the 0.3% rise likely notched in 2019. But at current stock valuations, the market likely wants low double-digit earnings growth to be satisfied.
Anything less would probably be penalized by investors.
Concern #3: Extended business cycle
Few on Wall Street would argue that the decade long economic expansion isn’t long in the tooth. Paying up to own stocks here amid what looks to be a 2% to 3% GDP growth trajectory in 2020 is a lot to ask.
“While the current economic expansion is the longest in the post-war period, it is also the slowest,” Golub acknowledges. He thinks the expansion is far from over and that recession risk remains low.
Concern #4: Election season
Ask countless investors (as we have done at Yahoo Finance) and the headline risk from Election 2020 isn’t even on their radar screens yet. The reason? There are numerous others to be mindful in the global economy and Corporate America — worrying about election outcomes could be dealt with a month before we head to the polls, experts proclaim.
The data is on the side of that argument.
Stock Trader’s Almanac notes that the S&P 500 has only dropped in four of the 23 presidential election years going back to 1928.
Nevertheless, headline risk to stocks from election season is real. Intelligent investors are correct in being concerned and thinking about portfolio reallocation today.