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Stock Market Forecast 2020: Clear Skies From Fed, China Trade, But Election Clouds Loom
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The stock market forecast for 2020 looks bright to start the new year. The Dow Jones Industrial Average, S&P 500 and Nasdaq composite hit record high after record high in late 2019. The stock market rally kicked into higher gear as the Fed switched to cutting rates and a China trade war truce took hold.

Stock market bulls are betting that business investment, corporate earnings and emerging market economies will now revive. The momentum for the stock market rally and Trump economy should carry through at least mid-2020. Then Wall Street will turn its focus to the outcome of the 2020 election — with the risk of a major U-turn in tax and regulatory policy — and reassess the chances of a new Fed rate-hike cycle.

Apple (AAPL) and chips such as Advanced Micro Devices (AMD) and Nvidia (NVDA) are expected to continue to lead the stock market rally into the new year as a "5G supercycle" gets underway. Plus, the breadth of leadership is bullish for the stock market forecast for 2020.

Vertex Pharmaceuticals (VRTX) and other biotechs are leading a healthy medical sector. JPMorgan Chase (JPM) and other bank stocks are depositing fat gains, while Mastercard (MA) and payment stocks look solid. Microsoft (MSFT) and Adobe (ADBE) are faring well as software stocks try to reclaim leadership. Even Caterpillar (CAT) and many industrial and cyclical names are reviving. While the retail climate remains challenging, standouts from Alibaba (BABA) to Target (TGT) are thriving.

Stock Market Forecast 2020: Bad News Is Good News

In late 2018, recession fears grew as the China trade war escalated and the Federal Reserve continued to hike interest rates despite signs of slowing economic growth and a sharp stock market correction.

Fast forward to the end of 2019, and policymakers have reversed course, with a trio of Fed rate cuts and a generous dose of new asset purchases fueling stock market gains. Meanwhile Trump's China trade war has culminated in a phase-one China trade deal, avoiding tariffs on the Apple iPhone and turning this year's recession threat into next year's economic stimulus.

Is The Stock Market Forecast For 2020 A Repeat Of 2017?

Suddenly, the stock market rally is looking a lot like 2017. Back then, the prospect of Trump tax cuts and deregulation, helped along by a broad upturn in global growth, fueled a remarkably smooth stock market rally. The S&P 500 index had very few days with gains or losses of 1% or more.

Since the stock market rally revived in early October, the major indexes have been in a strong, steady ascent, with only a modest post-Thanksgiving pause. While a tranquil bull may be hard to sustain for another 12 months, current conditions are positive for the 2020 stock market forecast.

There is always the risk of the unexpected. Many Wall Street firms worry that lack of clarity about China trade deal terms leaves room for disappointment in the stock market forecast for 2020. Yet the big current risk for investors seems to be missing out on a potential stock market melt-up.

Is Wall Street too sanguine about the staying power of tame inflation, low interest rates and the economic expansion? Peter Berezin, BCA Research chief global investment strategist, thinks so. He sees an inflation threat emerging that could derail the expansion by the end of 2021.

But, even if he's right, Berezin is bullish about the stock market forecast for 2020.

"The second-to-last year of a business cycle expansion tends to generate outsized returns," he told clients on a Dec. 18 conference call. "We may be entering this blowoff phase for global equities."

Stock Market Outlook: No Technical Red Flags

Wait a second: Are we potentially entering a blowoff stock market phase or have we been in one all year? With the Dow Jones up 22.3%, the S&P 500 index 28.9% and the Nasdaq composite 35.2%, it's a fair question.

Yet, despite a decadelong secular bull market, technical analysis suggests that Wall Street hasn't yet gotten carried away.

One key metric tracked by IBD is the 5-year gain in the S&P 500. While powerful rallies interspersed two significant market corrections over the past five years, stocks spent the bulk of the period marking time. Stocks essentially went nowhere from the end of 2014 until Trump's surprise election victory in November 2016.

Then, after the tax-cut-fueled rally peaked in late January 2018, the China trade war and Fed rate hikes kept the stock market rangebound. The S&P 500 trudged another 21 months before decisively breaking above prior levels in October.

The S&P 500 index is only up 57% over the past five years. That compares to an 89% gain at the 2007 peak and a whopping 210% at the 2000 peak.

Margin Debt Tame, Valuations Aren't Stretched

Margin debt can also signal when the stock market has become dangerously frothy. Year-over-year margin debt growth in excess of 55% would raise a red flag. By comparison, the latest data shows margin debt down nearly 5%.

Valuations have gotten richer over the past year as the S&P 500 surged while earnings flatlined.

S&P 500 earnings per share are projected to rise 9.6% in 2020, as revenue grows 5.4%, according to FactSet Research. Year-ahead estimates generally prove a bit too bullish.

"Stocks aren't cheap," said Ed Yardeni, chief investment strategist at Yardeni Research. Yet above-average valuations make sense "when investors don't see a recession in sight" and low bond yields make equity returns look more attractive on a relative basis.

As of Dec. 27, the S&P 500 traded at 18.2 times 12-month forward earnings. Yardeni said he'd be worried about a correction if the forward price-earnings ratio exceeds 20, which it hasn't done since early 2002.

That threshold could be in play, if the S&P 500 melts up early in 2020 to his year-end 3500 target. Yardeni sees that as a possibility.

Will Fed Rate Cuts, Trade Deal Lead To Global Rebound?

The bull case for the stock market forecast for 2020 hinges on a moderate global economic rebound. That's not a given. Some economists doubt that Fed easing will pack much punch and fret that the phase-one China trade deal may do little to unwind tensions holding back business investment. But those doubts mean that all the good news may not be priced in: There's still a wall of worry for the stock market rally to climb.

Prospects for a global upturn look pretty good as numerous headwinds fade and tailwinds pick up. After a few years' divergence, the Federal Reserve, the European Central Bank and the Bank of Japan are working in concert. Central bank bond buying has helped push global equities markets higher. The U.S. dollar has eased off its recent perch, a positive for emerging market economies encumbered by dollar-denominated debt.

"Our upside case for next year seems to be playing out," said Michael Crook, head of Americas investment strategy at UBS Global Wealth Management.

China Trade Deal Buoys Economic, Stock Market Outlook

UBS went overweight equities after the U.S. and China agreed to a trade deal, including a slight tariff reduction, on Dec. 13. The biggest impact of the phase-one China trade deal "comes from removing the downside," Crook said.

While tariffs have caused disruption, the big fear has been that a full-fledged China trade war would morph into a technological cold war, driving a wedge between the globe's biggest economies.

Instead, the global economy got a double-dose of relief this month. Not only is there a China trade deal with tariffs coming down, but the odds of a disruptive, no-deal Brexit have faded with Prime Minister Boris Johnson's Conservative party winning a majority.

Monetary Policy Is Global Tailwind

As those clouds part, the Jedi force of monetary policy may prevail once more, before its power is spent. Lower mortgage rates, tied to easier Fed policy, already have re-energized the U.S. housing sector. In November, building permits hit 1.4 million units at an annual rate, the highest since 2007. Homebuilder confidence is at a 20-year high. Treasury yields have risen in recent months, but are still historically low.

Globally, reduced uncertainty, easier credit and modest fiscal stimulus — in Europe, China, South Korea and Japan — should get traction.

The auto market, which has been in reverse, is a wild card. The transition to more exacting emissions standards, reduced government incentives and economic softness cut into global sales, with pronounced weakness in Europe and China. But European sales have turned positive off a depressed base. Chinese sales are expected to follow suit in 2020.

The recent news that Boeing will suspend 737 Max production is expected to cut up to a half-point from U.S. GDP growth in the first quarter, depending on how long it lasts. But that temporary lull could keep pressure on the dollar, providing more fuel for emerging markets.

2020 Election Risk: Will Wall Street Fear Trump Loss?

Fed easing and the China trade deal have lit a fire under financial markets and put a spring in the U.S. economy's step.

U.S. growth should remain solid up through the 2020 election, with the unemployment rate holding near a 50-year low. While a strong economy and stock market rally won't assure President Trump of reelection, it will make him hard to beat. Trump now leads all but one of the major Democratic contenders in the latest IBD/TIPP Poll. That exception is Joe Biden, and even there Trump is closing the gap.

That means there's no immediate reason for Wall Street firms to begin pricing in a Trump loss — or loss of GOP Senate control — in the 2020 election.

That's probably good news for the stock market forecast for 2020 — even though the Dow Jones has fared well under Democratic presidents. Why? Democratic candidates in the 2020 election cycle — including front-runner Biden — all want to substantially reverse Trump's big corporate tax cut, which slashed effective tax rates for S&P 500 companies by roughly one-third.

It's hard to argue that a direct hit to earnings is anything other than a clear negative for share prices.

Several candidates seek to raise tax revenue far above Obama levels, with Elizabeth Warren and Bernie Sanders both calling for a wealth tax.

2020 Democrats Have Big Policy Agenda

Sanders and Warren also have called for a ban on fracking. While most fracking is on private land, exacting regulation could blow up energy prices and depress big swathes of the U.S.

The two left-wing contenders also endorse "Medicare for All." More traditional liberal candidates favor a public option, but the sweeping health care reforms would have a dramatic impact on providers, insurers and millions of jobs.

Warren has called for breaking up Big Tech giants such as Facebook (FB). Even without control of the Senate, a Democratic president could enact big policy changes on antitrust and a wide range of other corporate issues via regulation and enforcement.

Democrats also generally support drug price controls that could roil Big Pharma and biotechs.

There still could be a white-knuckle period for investors and corporate CEOs if the White House and Senate 2020 election contests look like a coin flip. But it probably won't happen at least until the party conventions next summer.

In the meantime, the strong economy — and rising Trump support — could convince Democratic primary voters to shy away from more left-wing candidates, whose economic prescriptions and control of the regulatory state could be more disruptive for business.

The Outlook For Inflation, Interest Rates And Fed Policy

The Fed will be on hold, at least through the 2020 election. Yet interest rates are still a wild card. Depending on the path of inflation and unemployment, investors could begin to price in Fed rate hikes for 2021.

If growth solidifies, longer-term market rates will rise on expectations for future Fed hikes and higher inflation.

After all, 12 of 17 policymakers penciled in a Fed rate hike for 2021 in their December projections.

Yet another dovish turn isn't out of the question. Trump still could influence policy with appointments to two open Fed governor seats. Meanwhile Chairman Jerome Powell will oversee an updated strategy for achieving the Fed's 2% inflation target. The midyear update could explicitly encourage inflation overshoots to offset long periods of sub-2% inflation.

Bottom line: Inflation and upward pressure on interest rates could be a story for the second half of the year, but don't count on it.

Stock Market Outlook 2020: Which Sectors, Regions Will Thrive?

At the moment, there's not much to fear except that stocks will get ahead of themselves. How can individual investors participate? IBD outlines a 3-step guide for self-directed investors. That starts with a check of the stock market trend, which is flashing a green light: Confirmed uptrend. Step 2 is using IBD Stock Lists to identify top stocks to buy and watch. Step 3 involves using IBD Stock Checkup to help winnow out the wheat from the chaff and IBD stock charts and analysis to identify proper buy points so you're ready to seize opportunities.

A broad-based upturn in global growth would lift almost all boats, including the unloved energy, mining and heavy equipment sectors. There are some promising signs, with copper and oil prices both near their highest levels since May. Southern Copper (SCO) and Caterpillar stock are both near buy points.

BCA's Berezin thinks emerging markets are poised to reverse some of their long underperformance, as global uncertainty abates, China applies fiscal and credit stimulus, and manufacturing recovers. A softer dollar, also key to his outlook, would give an extra lift to profits earned in foreign currencies.

The 5G Supercycle: Apple Stock To Nvidia To Verizon

A key catalyst in 2020 and beyond will be the launch of 5G wireless networks. Their dramatically faster speeds, greater capacity and near-instant connections are seen as key to autonomous driving and other transformative applications. Verizon Communications (VZ), AT&T (T), T-Mobile US (TMUS) and Sprint (S) have begun deploying 5G networks. China, South Korea and Japan are among the early adopters. But those are expensive upgrades.

So the money, and the stock market gains, may be in the 5G hardware. Apple stock and the broader chip sector have surged in 2019 on expectations for a 5G wireless upgrade cycle, even as many of these names had stagnant or tumbling earnings in recent quarters.

Apple iPhones released next fall should be 5G ready. On Dec. 23, Wedbush hiked its Apple stock price target, saying iPhone demand should surge 10% as a huge upgrade cycle gets underway.

Chipmakers with 5G exposure include AMD stock and Nvidia stock to Apple iPhone suppliers such as Qualcomm (QCOM), Qorvo (QRVO) and Skyworks Solutions (SWKS).

Just as Nvidia stock and others tend to rally ahead of demand, they can peak before earnings deteriorate. But the 5G upgrade cycle could last for years.

Medicals Are In Good Health

The vast, varied medical sector is thriving. With "Medicare for All" fears fading, health insurers, hospitals and other medical service firms are rallying after tumbling for much of 2019. With drug-price controls off the table, FDA approvals accelerating and M&A heating up, biotech stocks are soaring after lagging for years. Vertex stock, Crispr Therapeutics (CRSP) and Amgen (AMGN) are faring well, while a slew of smaller names have skyrocketed on positive drug news.

Medical product and devices makers also doing well, including Dexcom (DXCM) and Edwards Lifesciences (EW).

Bank Stocks Ride Yield Curve Wave

Financial stocks have already "had a good run since the yield curve flipped," but remain relatively cheap, Yardeni said.

Banking giants have been long-term laggards vs. the S&P 500 index. But JPMorgan Chase stock and peers are enjoying a run amid an easy Fed, firming economic growth and widening Treasury yield spreads. With the Fed anchoring short-term rates, net interest margins will benefit as long-term rates keep rising.

Payment Stocks

Payment stocks are quietly improving, with Mastercard stock breaking out and archrival Visa (V) back in a buy zone. Fiserv (FISV) is just out of range, while Global Payments (GPN) is in a buy zone.

All of these payment stocks look strong. None look like screamers now, but several have been huge long-term leaders, notably Mastercard stock, Visa and Fiserv.

Retail: Thrive Or Die

With unemployment at a 50-year low and decent economic growth going forward, wage and job growth should continue to fuel solid consumer spending. But the spoils won't be shared equally. Department stores and mall-based chains continue to reel and even mass-disruptor faces some challenges.

But there are notable pockets of strength. Target stock has soared as the big-box discounter delivers accelerating growth from a hybrid model of physical and online sales. So have Walmart (WMT), Best Buy (BBY) and Costco Wholesale (COST) to varying degrees. Off-price discounters like Burlington Stores (BURL) and salvage vehicle auctioneer Copart (CPRT) remain steady growers, while Lululemon Athletica (LULU) and RH (RH) are thriving among upscale customers. Chipotle Mexican Grill (CMG) is among a handful of tasty restaurant stocks.

Broadening out to consumer discretionary, Nike (NKE) is benefiting from solid U.S. and Chinese demand.

Speaking of China, Alibaba stock is surging, while several other China internets are looking better.

Communications Sector

The revamped S&P 500 communications services sector includes Google-parent Alphabet (GOOGL), Facebook, Disney (DIS) and Netflix (NFLX), in addition to old staples Verizon and AT&T.

FactSet Research says the communications services sector is forecast to lead all 11 S&P sectors in 2020 with 9.1% revenue growth, vs. 5.4% for the entire S&P 500.

Despite antitrust concerns in the 2020 election cycle, Google stock is at record highs and Facebook stock is just in a buy zone. Disney stock is just below a buy point while Netflix stock is lagging.

Can Software Bounce Back?

If business investment improves, that would be good news for software. The sector was the clear leader to start 2019 but faltered and is struggling to catch up.

Microsoft stock has a been a steady leader throughout 2019. But that largely reflects the Dow tech giant's booming cloud-computing services. Adobe stock and a few other software names such as Paylocity (PCTY) and Fortinet (FTNT) are marching higher. Shopify stock is almost back to new highs, which would be notable. Shopify (SHOP), an e-commerce software giant, is one of the clear stock market winners of 2019.

Stock Market Forecast 2020: No Crystal Ball

When it comes to the 2020 stock market forecast, investors can interpret, but don't try to predict. Right now, the action of the major indexes and leading stocks are favorable for the stock market outlook. So are economic conditions, with Fed policy, China trade and other big uncertainties receding into the background.

But the 2020 election could quickly alter stock market forecasts, especially if a left-wing candidate wins the Democratic nomination and appears headed for victory in November. A revived or new trade war or some surprise economic news or financial crisis could upend the 2020 market outlook.

The best way to interpret any developments is to analyze the daily price and volume trends in the major market averages. Stay in sync with the stock market for long-term success.

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