- The Dow Jones hit another record high last week. Phase one of the US-China trade deal has propelled markets higher.
- Trump’s impeachment failed to dent market sentiment as investors focused on the resilient economic data at home and in China. Incidentally, many forecasts about stock markets were wrong in 2019, as they were for 2018.
The Dow Jones (DIA) set another record last week. As tweeted by Donald Trump, stock markets hit their 135th high since his 2016 election win. Although that statement doesn’t seem to make much sense, as the Dow Jones has not moved much from its 2018 highs, US stock markets have indeed fared well under Trump’s presidency. The US economy has also been resilient despite recession pundits foreseeing an imminent recession this year.
Stock markets: Pundits were wrong about 2019
As US stock markets plunged in last year’s fourth quarter, many observers held apocalyptic views for 2019. The US-China trade war, slowing global economy, and Fed rate hikes were among the risks for this year. There was also the yield curve inversion, which many see as the ultimate recession indicator. However, it turns out recession pundits had things all wrong. In January, we suggested that the economic outlook wasn’t as gloomy as some were saying. The Dow Jones had its best January in more than 30 years in 2019.
Many pundits were wrong about 2018 as well. It was expected to be a year of synchronized global growth. However, as the year progressed, it turned out to be the opposite. The Dow Jones tumbled in the fourth quarter, and Trump advised buying stocks. Following Trump’s advice might have made you rich.
Dow Jones at record highs but Warren Buffett missed out
If you missed out on the Dow Jones rally, take heart in the fact that many Wall Street legends, including Warren Buffett and Stanley Druckenmiller, also missed out. Last week, Druckenmiller admitted that he had been a little too conservative. And as for Buffett, in his annual letter, he said publicly traded stocks’ valuation was high. Buffett has been scouting for a big acquisition but hasn’t been able to grab any. The availability of cheap money may be upping his competition.
For example, Buffett’s Berkshire Hathaway missed out on Tech Data, outbid by Apollo Global Management. Berkshire Hathaway is underperforming the Dow Jones and the S&P 500 (SPY) by a wide margin this year.
Chinese trade deal and economic data
Last week, the US and China agreed to phase one of a trade deal. The deal, expected to be signed next month, has relieved markets of some uncertainty. The trade deal, coupled with the United States–Mexico–Canada Agreement, helped propel the Dow Jones to a record high last week. Resilient economic data was another cherry on the cake. US housing indicators showed a strengthening market, with building permits surging to multiyear highs in November. Furthermore, several economic data points from China show that the world’s second-largest economy may be bottoming out. Optimism over the economy seems to have overshadowed impeachment concerns among investors.
Fund managers turning bullish on stock markets
A couple of months back, most observers were bearish on stock markets. However, the Dow Jones has denied bears of any major victory, and has continued its good run in the fourth quarter. A Bank of America survey has shown that fund managers are now turning bullish on equities. Whereas analysts foresee modest returns next year after a strong 2019, their outlook could become more positive given the US economy’s resilience and China’s improving economic outlook.
Dow Jones 2020 outlook
In my view, things look evenly placed. We might see some incremental fund flows into equities as sentiments improve. However, next year, the Dow Jones might not give the stellar returns we got this year. Additionally, it would be prudent to expect volatility given the upcoming 2020 presidential election, and to bear in mind that phase one of the China trade deal has yet to be signed. In simple terms, it’s not a done deal yet. Furthermore, from a valuation standpoint, stock markets don’t look attractive to value investors. For more analysis, read S&P 500 at Record Highs: Not Much Upside in 2020.