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Three Trends for 2020- Dividend Growth, Sustainable Impact and the Election

There are several positive factors supporting a continuation of the bull market that began in March 2009: interest rates are low, GDP growth is consistent and solid, earnings are poised to grow, and valuations are not yet overly stretched, forecasts John Eade, chairman and CEO of Argus Research Group.

Our economic, earnings and valuation models point to another year for the bull market. We expect 1) earnings to grow 10%-12% after low single-digit growth in 2019; 2) interest rates to remain at historically low levels, though the 10-year yield may rise toward 2.2%; 3) the Federal Reserve to stay on the sidelines in the election year; and 4) valuations to widen a bit.

More from John Eade: Top Picks 2020: Novartis (NOV)

Our target price for the S&P 500 is 3550, or 18-times our 2021 EPS estimate, as the market is always looking ahead. In a certain-to-be-unpredictable investing environment, here are some of the key themes that we think will be important over the next 12 months:

Dividend Growth

This is among our most important themes, and stretches across industries. At this stage of the economic and market cycle, Argus recommends that investors focus on dividend growth instead of dividend yield, especially as long-term interest rates tick higher. Specifically, we are bullish on persistent, high-rate dividend growers — companies that have consistently boosted their dividend for many years and at an above-average rate.

We think that consistent -- and accelerated -- dividend growth sends three important signals: 1) that a company’s balance sheet is strong enough to pay a dividend; 2) that management is mindful of shareholder returns, which include dividends; and 3) and that management believes the near-term outlook for the company is promising. We especially like companies that have grown their dividends at a double-digit pace over the past five years.

Stocks on our BUY list that meet this test include: Walt Disney Co. (DIS), Home Depot Inc. (HD), TJX Companies (TJX), Oneok (OKE), Allstate (ALL), Truist Financial (TFC), Baxter International (BAX), S&P Global Inc. (SPGI), L3Harris Corp. (LHX), Lockheed Martin Corp. (LMT), Intuit  (INTU), Texas Instruments (TXN), American Water Works (AWK), and WEC Energy Group (WEC), among others.

Election Year

Of the four years in the presidential term, the last year – the election year – has been the worst for investors. Consider: since 1980, returns in the fourth year of the presidential term have averaged 4.1%, compared to average returns of 14.4%, 5.6%, and 15.8%, respectively, in years 1-3.

Why? The likely reason is uncertainty. Investors favor continuity, and an election year offers a real opportunity for a change in direction, whether it’s fiscal policy, antitrust philosophy, or a certain regulatory focus.

See also: Take these Values to the Bank: JPMorgan, BofA, Citi and Goldman Sachs

We note that incumbents typically win re-election, and the early odds out of the U.K. favor President Trump by about 10/11. Should he win, industries likely to benefit could include Aerospace & Defense, which have done well under his presidency, and Energy companies, which have not, despite favorable regulations.

Our top picks in these groups include Lockheed Martin (LMT), Northrop Grumman (NOC), Raytheon (RTN), Leidos Holdings (LDOS), and L3Harris Technologies (LHX), as well as Oneok (OKE), Valero Energy (VLO), and Chevron (CVX).

Should a Democrat win, sectors such as Clean-Tech, Med-Tech and Business Services may do well as regulations change, and defensive groups such as Consumer Staples and Utilities may be better at holding on to value.

Our top picks in these groups include First Solar (FSLR), Itron (ITRI), Honeywell (HON), Tesla (TSLA), Johnson Controls (JCI), CVS Health (CVS), Cerner Corp. (CERN), Automatic Data Processing (ADP), FiServe Inc. (FISVColgate-Palmolive (CL), Walmart (WMT), Xcel Energy (XEL), and NextEra Energy (NEE).

Sustainable Impact investing

This trend has had legs for the past decade, as assets under management in SRI funds have grown to $11.6 trillion in 2018 from $178 billion in 2005, according to the Forum for Sustainable and Responsible Investment. The UN Principles for Responsible Investing -- to which Argus Research is a signatory -- now represents more than 1,750 signatories with assets of US$70 trillion, according to BMO Global Asset Management.

As assets have flowed in over the past 40 years, Sustainable Impact Investing has evolved. The discipline, originally known as Socially Responsible Investing, focused at first on excluding companies that conducted business in South Africa, or participated in industries such as tobacco, alcohol and firearms.

In time, the list of industries to avoid increased to include soft drinks, fast food, and oil and gas, among numerous others. The performance of these initial strategies lagged, and the approach has been modified.

Now, instead of merely identifying industries to avoid, the discipline promotes “sustainable” business practices across all industries that can have an “impact” on global issues such as climate change, hunger, poverty, disease, shelter, and workers’ rights.

Once a year, we screen the companies in the Argus Universe against the Sustainable Impact criteria established by JUST Capital Inc. We have designed a portfolio based on this investment theme, in conjunction with UIT partner SmartTrust, and as a separately managed account.

Stocks that score highly on the Sustainable Impact criteria and are included in our portfolio are JPMorgan Chase (JPM), Lowe’s (LOW), Abbott Laboratories (ABT), PNC Financial Services Group (PNC), Waste Management (WM), UnitedHealth Group (UNH), Merck (MRK), Microsoft (MSFT), Norfolk Southern (NSC), KLA Corp. (KLA), and Northrop Grumman (NOC).