Dow Jones Industrial Average Closes at Record High. Good Luck Next Year. - Barron's

Next year won’t be an average one for the S&P 500—that would mean gaining 7.7%, something it has done just once since 1928, in 1966. Photograph by Drew Beamer

The stock market has its reasons which reason does not know—and that has led to impressive gains in 2019. What will 2020 bring?

The market will probably have a hard time living up to 2019. The Dow Jones Industrial Average has risen 23% in 2019 after gaining 190.17 points, or 0.7%, to 28,645.26, this past week, while the S&P 500 index has gained 29% after rising 0.6%, to 3240.02, and the Nasdaq Composite has climbed 36% after finishing the week up 0.9%, at 9006.62. The S&P 500 and the Dow both closed the week at all-time highs.

I’ll just come out and admit it—I don’t know what the stock market will do in 2020. But I have a pretty good suspicion about what it won’t do. Next year won’t be an average one for the S&P 500—that would mean gaining 7.7%, something it has done just once since 1928, in 1966.

What happened in 1966? Lyndon B. Johnson, the original LBJ, was president, the Beatles released Revolver…and not much else. For all we can tell, it was a very average year.

Next year probably won’t look like Wall Street’s strategists predict it will, either. Their average target for the S&P 500 comes in at 3350, a 3.4% rise from Friday’s close. A gain that small doesn’t happen too often, however. The S&P 500 has closed with a gain of 0% to 5% just nine times since 1928.

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Part of the problem with making predictions is that we are wired to be reasonable. We take an estimate for earnings growth, multiply it by a theoretical valuation and get a perfectly acceptable forecast for the S&P 500. The market, though, is rarely reasonable. In 2018, S&P 500 earnings grew by 24%, yet the index fell 6.2%. In 2019, earnings look set to dip 1.4%, but the S&P 500 could be set to notch its best year since 1997. You call that reasonable?

Being a reasonable man, I’d like to think that big gains inevitably lead to big losses—gravity and all that—but history suggests otherwise. The S&P 500 has finished higher two-thirds of time after gaining 25% or more in a single year. Simply based on the odds, it would be reasonable to conclude that it’s time to bet on more upside.

Or not. The market is anticipating a lot of good news: The U.S. and China sign a trade deal, which gets companies spending again, helping to boost economic growth in the U.S. and abroad and lifting corporate profits. The Federal Reserve, meanwhile, lets the economy run a little hot, making up for the sluggish growth of the past 10 years. Toss in some government spending and you have explained not only this year’s big gains, but next year’s, as well.

All that’s missing is what could go wrong. We have a few things: The trade war between the U.S. and China could heat up again. Europe could become President Donald Trump’s next trade target. Inflation could heat up and cause the Fed to start thinking about raising rates again. And the economic acceleration the market appears to be expecting might simply fail to show up.

Everyone else may be looking at the bright side. We have our doubts.

Write to Ben Levisohn at Ben.Levisohn@barrons.com

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