Dow 30,000 – What could possibly go wrong?
By David Nelson, CFA CMT
Tuesday November 24th the Dow Jones Industrial Average closed above 30,000 for the first time. That’s a long way from its first close of 40.94 May 26, 1896. Today’s Dow looks a lot different than the original 12 companies. Even General Electric (GE) was kicked out of the index in 2018.
Of course, Dow 30,000 doesn’t have the same ring if you’re one of the 778k Americans who were laid off last week. The national disgrace of a Congress unwilling to put aside partisan politics and help these Americans not to mention the thousands of businesses that employ them flies in the face of the very intent of government. Just about every economist on the planet including voices from the Federal Reserve has told Congressional leaders some type of fiscal stimulus is needed as a bridge even with several vaccines about to be deployed.
Last week equity markets continued to drift higher adding to a November surge fueled by investor capital coming off the sidelines. The combination of multiple vaccines and the passing of an election cycle lets investors look across the valley concerned less with the current rise of Covid cases throughout the country and more about a return to normalcy.
Of course, the term will take on a whole new meaning post the pandemic as some industries will find it difficult to get back to previous levels of revenue and earnings. Given the advances made in stay at home technology business travel will be challenged even as the world goes back to work. I’m quite certain Americans will jump on planes to Orlando to visit Mickey and Goofy but may think twice about a flight to Los Angeles for an ordinary business meeting. Zoom (ZM) and other video conferencing products are just too good to pass up not to mention the billions of dollars saved as business travel and hotel expenses are cut dramatically.
Commercial real estate will also find it difficult as many companies have already decided to reduce their office footprint opting for employees to continue to work at home.
In the meantime, stocks have already looked across that valley and are starting to price in a decidedly better future. Why not? The data is constructive. Estimates continue to rise; companies are starting to deploy capital and we have several vaccines that could get us to herd immunity.
Goldman Real GDP Forecasts
Global GDP is likely to average 6% next year. Estimates for the developed world on a country by country basis range from 2% to as high as 9%. Current estimates for the U.S. are about 4% with some economists leaning higher.
The Fed continues to be accommodative and has virtually assured us they have no intention of raising rates for years. In that backdrop it’s not surprising Wall Street houses are raising their price targets for 2021 with some bulge bracket firms predicting large gains for the coming year. What could possibly go wrong?
Group think is incredibly dangerous. By definition it discourages creativity or individual responsibility. While there is an endless list of reasons to be bullish on equity returns for next year, we need the other side of the argument to keep us from going off the deep end. This is not a time to be complacent. Especially since bears today are becoming an endangered species.
In the face of plunging profits, a pandemic that brought the world to its knees and the most divisive election in our lifetimes stocks once again have pushed to all-time highs. Yeah, yeah, yeah stocks are a forward-looking mechanism. Some would say they are looking all the way to 2025. I’m bringing this up because I’m one of the bulls!
What could go wrong? Here’s a few things to think about.
- What if the vaccine rollout doesn’t go as planned or worse the immunity doesn’t last long enough?
- The Fed loses control of the long end of the curve and 10-year yields start to become competitive
- China is an adversary in every sense of the word – If nothing else has happened in the last 4 years that statement is an absolute now embraced by both sides of the political aisle. Biden is sure to be tested both economically and perhaps militarily early in his term
- Inflation forces the Fed hand sooner than expected. The Fed has repeated often their intent to keep rates as low as possible even willing to let inflation run higher and longer than they would have in the past. There are limits to this mindset. If forced to the Fed will act which would put pressure on multiples.
It’s what we don’t see below the waterline that is the most dangerous for a ship traveling across unchartered waters. Right now, is one of those times. Remember by definition a Black Swan event can’t be forecast.
The point is in the end we really don’t know what lies ahead and have limited ability to predict the future. What happens doesn’t matter. Are we prepared to respond in real time to the challenge when it arrives? The answer is the difference between success and failure.
*At the time of this article some funds managed by David were long GE