Year End Stock Market Update and Forecast 12-27-2020
2020 was a year for the history books! To recap, after a dreary 2018, in which an already extended stock market (burdened as well by greater monetary restraint on the part of the Federal Reserve), saw some entirely reasonable profit taking, equities took off in 2019. In all, they soared to record highs and promised more of the same in 2020. Falling interest rates and prospects for steady, if unimposing, GDP growth, only furthered the case for a solid stock market performance. And, indeed, Wall Street delivered on cue, with the Dow Jones Industrial Average posting impressive early gains, which left that composite on the doorstep of 30,000.
Then, COVID-19 struck, and within weeks all optimism evaporated, with the Dow tumbling to just over 18,000 by late March. Encouragingly, that crash ended about as quickly as it began. By early spring, a reopening of large swaths of the economy, the infusion of an initial round of major fiscal stimulus, and expectations that warmer weather would bring relief on the disease front all helped lift investor spirits, enabling the stock market to recoup most of its late-winter losses. Then, when the summer helped slow the disease track and the early second half brought a rebound in business activity, equities rallied during July and August. However, fears of a second and third wave of the virus sent stocks into a modest descent in September and October. Optimism a COVID-19 vaccine would soon arrive (with its positive implications for the economy) then helped stocks stage another about face, this time lifting the major indexes to record highs, with the Dow finally surpassing 30,000. Clearly, 2020 was all about this global pandemic—a once-in-a-century event that no one could have timed. That is where we are, as one year ends and another begins.
As to the numbers, the Dow Jones Industrial Average, lifted by a solid fourth quarter, was up 5.9% in 2020 (as of press time), with late strength in Disney, Boeing, and Travelers; the S&P 500 was ahead 14.5%; and the tech-heavy NASDAQ was better by a blistering 42.0%. Unlike 2019, when nearly all of the blue chips were up for the year and just a few were down, 2020 saw nearly half of those stocks falter. Given the dour backdrop,however, it was a remarkable showing. Individually, we saw that the best performing Dow issue in 2020 was Apple Inc. That was the second year in a row in which this tech behemoth had led the way. Also posting member salesforce.com, Microsoft, NIKE Inc., The Home Depot, and Walmart. Interestingly, few of these 2020 winners turned in particularly strong performances during the fourth quarter, reflecting sector rotation down the homestretch. The year’s late bloomers included Disney with its strength apparent in streaming video, Boeing, Travelers, Honeywell, JPMorgan Chase, and Chevron. Within this group, just three stocks, Disney, Honeywell and Travelers, were ahead for all of 2020, at press time. It was that kind of year.
Looking at 2021, we see a resumption of steady, if unexceptional, GDP growth of 2%-3% and continued accommodative monetary policies by the Fed, with its Chair, Jerome Powell, noting after the December FOMC meeting that the bank would increase support for the economic expansion if there are signs of a significant slowdown in activity in the months ahead. Meantime, 2021 will bring a new Administration to Washington and likely adjustments in trade, regulatory, and tax policies. It should be noted that Chair Powell is unlikely to be displaced, as the position is not routinely turned over when a new President takes office. Offshore, while there will be challenges, hopefully any hurdles will not be as monumental as they were in 2020 when a pandemic of historic proportions spread rapidly. The unfolding of such a relatively benign scenario should help to keep the resurgent bull market intact in 2021. Specifically, our 12-month estimates reflect the probability that the economy, after a likely slow disease-impacted start, will press ahead fairly consistently. Meanwhile, based on this business outlook, our 2021 forecast calls for Dow-30 earnings—which we estimate were off 17% in 2020—to rebound by 24%. Dividends, off just 0.2%, should edge higher by 2.1%. Inserting these figures and incorporating expectations of flattish interest rates, the average price for the Dow in 2021 based on our model would be just under 30,000. That works out to be 12% above the 2020 average price of 26,800 and incorporates a sharp projected recovery in earnings and a slight upward tilt in dividends. That roughly 12% gain is the figure to keep in mind, given the way our model works; don’t be distracted by the fact that the 30,000 number is similar to where the Dow stands today. What’s more, after likely falling by 17% in 2020 on significant pullbacks at American Express, Boeing, and Caterpillar, among others, earnings of 28 of the 30 Dow components are forecast to rise as COVID-19 starts to fade once vaccines are distributed on a nationwide scale, and assuming possible new strains, such as we are seeing in the UK, do not become severely problematic. In all, this estimated profit rebound could be sufficient to keep the average price for the Dow in 2021 in a relatively steady range that is in line with recent, historic levels. Meanwhile, the Fed, uncertain about the economic outlook, is likely to hold interest rates steady. The projected absence of any downward rate adjustments by the central bank, coupled with what again are elevated P/E multiples, may make it a challenge for the Dow to press sharply above recent levels during 2021. As to our forecast, such a mix of variables is the basis for an average Dow price of nearly 30,000 in the year ahead. Although in line with recent record highs for that index, our forecast suggests investors should stick with a meaningful allocation to stocks. All told, given the projected price for 2021, the Dow would be selling for 21 times our earnings forecast of $1,420. A year ago, we estimated a P/E of 16.3 for 2020. Clearly, the stock market is richly valued—but with monetary support, may well stay that way.
Note: The band about the 30,000 Dow Industrials target allows for a wide variance in price during 2021. Specifically, that target price for the Dow represents the midpoint of a wide projected range in which the average price of that composite is statistically likely to wind up in 2021. The range for 2021 is 37,400 on the high end and 23,900 on the low end.
Conclusion: The just-ended year was a traumatic one for Wall Street, with the dramatic ups and downs experienced throughout the 12-month span a consequence of the once-in-a-century pandemic that has led to 18 million infections and more than 300,000 deaths at home. The economy also has suffered as have the fortunes of countless Americans. Hopefully, with the help of vaccines, this nightmare will end, so that a degree of normality can return at some point this year. Our Dow model assumes such an outcome. A year ago, in a different setting, we opined that: “additional market gains, which might come from time to time this year, may not evolve without some give and take.” That view was ultimately an understatement. A similar outcome seems logical in 2021, given the solid business and monetary trends likely to evolve over the course of the year.