2020 Vision: Stocks in Rally Mode To Start New Decade, with China in Focus

It’s a new decade, but China remains center stage just as it did for most of last year. A government stimulus and firm manufacturing data there seem to have U.S. indices reaching for record highs.

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5 min read
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Key Takeaways

  • The 2019 rally looks like it’s extending into 2020

  • China manufacturing activity shows expansion

  • Tesla’s quarterly delivery numbers awaited

(Thursday Market Open) The new year looks like it’s starting right where the old one left off, with stocks in rally mode to begin the decade and China at the center of things.

Major indices ticked higher in pre-market trading and looked like they might set new record highs following gains across most of Asia and Europe earlier today. Stocks in China got a boost from a private survey released Thursday showing manufacturing activity there remains in an expansionary mode. News earlier this week about a Jan. 15 trade deal signing also might be helping extend the 2019 market gains.

Speaking of China, the government there announced another move designed to increase liquidity, The Wall Street Journal reported. This appears to be part of Beijing’s efforts to prevent economic growth from slowing more, and the news could be helping the S&P 500 Index (SPX) in pre-market trading. The People’s Bank of China said Wednesday it would reduce the portion of deposits that commercial banks are required to set aside as reserves by half a percentage point, a move that essentially releases 800 billion yuan ($115 billion) into the financial system.

On another note, it’s surprising to see crude oil up just a nickel early Thursday considering the tensions that recently developed in Iraq. The question is whether U.S. crude prices can hold the $60 a barrel level.

Roaring ‘20s Revisited?

It’s the first trading day of a new decade (unless you’re one of those sticklers who insists the decade actually begins in 2021). Either way, it’s the first trading day of the “twenties” since December 1929, when Al Capone ruled the streets of Chicago and the market was still shuddering from an epic October collapse that helped lead to the Great Depression. 

That was more than 90 years ago, and the Dow Jones Industrial Average ($DJI) started the 1930s trading at around 200, vs. Tuesday’s closing price of above 28,500. Instead of starting the new decade in the midst of a historic sell-off like we did then, we’re beginning things on a truly positive note. Almost any investment people made last year likely went well, with about 90% of stocks in the S&P 500 Index (SPX) gaining ground in 2019 and the SPX rising 28%. It was the best year for the SPX since 2013, and it just missed being the best year since 1997.

Technology led the way, which might not be what some people expected a year ago. At that time, there was a huge fear that the Technology sector was going to suffer because of tariffs, yet at the end of the year Apple (AAPL) was the leading stock in the $DJI. Microsoft (MSFT) was another big gainer. AAPL and MSFT rose 86.2% and 55.3%, respectively in 2019. Don’t forget chipmaker Advanced Micro Devices (AMD), which rose approximately 140%. Chipmakers as a whole rose around 60% last year.

It’s easy to forget that just a year ago, we were coming off of what almost became a bear market and a truly underwhelming full-year performance of -6% for the SPX in 2018. The Fed’s course reversal last year from rate hikes to rate cuts helped right the stock market ship, and so did some signs of improvement in the U.S. housing market and consumer health. 

At the same time, some of the same potential stumbling blocks the market encountered in 2019 haven’t gone away in 2020, including tension in the Middle East and North Korea, the next round of trade talks with China, and the UK’s Brexit process. The market could also have to navigate through political stress here at home.

Don’t Sleep Through the Next Two Days

Investors have a short runway from the holiday to the coming weekend, but that doesn’t mean there’s nothing on the calendar these next two days. It might be tempting to take this time off, but that could mean missing a few important developments. 

One of those might be the U.S. dollar. The dollar index retreated quite a bit earlier this week to 96.50, well below 2019 highs of near 99. The dollar remained relatively strong throughout Q4, which means it likely won’t provide much of a tailwind for Q4 earnings. However, if it does stay below 97 in the weeks to come, it could start giving multinational firms a little help in the current quarter. 

Meanwhile, weekly jobless claims fell 2,000 to 222,000, the government reported Thursday morning. This could be positive news heading into next week’s non-farm payrolls report due Jan. 10. Last month a couple of higher than expected claims readings had some people nervous.

Another item well worth a look before the weekend is tomorrow’s ISM manufacturing report for December. You might remember back in early October when an unexpectedly low reading from the ISM gave the market an unpleasant jolt lower. The last couple of readings weren’t much better, with the index staying below 50%.

The November index came in at 48.1%, and anything under 50% represents contraction in the manufacturing economy. The index is down from around 60% in mid-2018, likely reflecting pain from the trade war with China. Analysts don’t expect much improvement from November to December, with the consensus for tomorrow’s headline reading at 49%, according to Briefing.com. A number lower than that might have a negative impact on the market.

Don’t forget, too, that December auto and truck sales come out tomorrow. That’s another way to get a sense of consumer health. We’ll probably get a good read on final holiday season shopping numbers, too, over the next few weeks, especially as some major retailers start reporting their Q4 numbers. 

The big news earlier this week was President Trump announcing a mid-month signing ceremony for the Phase One trade deal with China, and that might have helped lift the market on the final day of the old year.

In company news, media reports say Tesla (TSLA) might report its Q4 delivery numbers either today or tomorrow. Expectations in the analyst community are for around 105,000. That’s about what the company needs to reach 360,000, the low end of its expected range for the full year. Stay tuned. 

FIGURE 1: STRONG, STRONGER, STRONGEST: This one-year chart demonstrates quite clearly how well the major indices did last year, and how the Technology sector (IXT-blue line) outperformed both the Nasdaq (COMP-purple line) and the S&P 500 Index (SPX-candlestick) Data sources: S&P Dow Jones Indices, Nasdaq. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

Window Displays Going Down? Not to burst anyone’s new year’s bubble, but it’s possible that some of the recent market rally might have reflected a bit of late-year “window dressing.” That’s when fund managers tend to load up on the year’s most high-flying stocks to make sure those names appear in end-of-the-year reports they send to customers. In fact, window-dressing—along with end-of-year bonuses that often make their way into the market—is typically cited as contributing to the so-called “Santa Claus rally” that frequently occurs between Christmas and the first couple days of January. Since today is the first trading day of January, the rally might have a little longer to run, but then it’s likely going to be fundamentals playing a bigger role. Speaking of which, some analysts think current S&P 500 valuations of around 19 times projected 2020 earnings look a little lofty.

Holiday Season Ends, But Seasonal Noise Continues: Studies show that the stock market, particularly small- and mid-cap stocks, tends to perform well in January.  A variety of hypotheses surround why this happens, but the data are pretty clear: In nearly two-thirds of Januarys over the last 90 years, stocks have risen. There’s also the January barometer, which says that if stocks rise in January, investors can probably expect a strong year for the market. This one took a hit in 2018, however, when the SPX rallied more than 5% in January but ended up falling 6% for the full year. Which goes to show why for long-term investors, it’s often better to ignore some of the noise you might be hearing about supposed “seasonal” impacts and stay focused on your long-term goals.

One More Weekend: If you didn’t get a chance to over the holidays, there’s still the coming weekend to put aside a few hours to review your portfolio’s performance from 2019 and see if your current allocations still reflect your long-term needs. Did any major life events happen in 2019 like a new baby, buying a home, or retirement? Could any of these be on the way in 2020? Whether it’s an unanticipated wave of market volatility or simply the realization that retirement is fast approaching, there are times when you need to assess your portfolio and make sure it’s still appropriate for your circumstances. 

For instance, the nearly 30% stock market rally in 2019 might have stretched your stock allocations to levels above where you’re comfortable. If that’s the case, maybe it’s time to think of taking a little profit from some of the winners so you’re potentially less exposed to the risk of a market downturn. A lot of people spend more time planning their vacations than they spend on their portfolio planning, but that’s not necessarily the best path.

Good Trading,

JJ

@TDAJJKinahan

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This week's economic calendar. Source: Briefing.com
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Key Takeaways

  • The 2019 rally looks like it’s extending into 2020

  • China manufacturing activity shows expansion

  • Tesla’s quarterly delivery numbers awaited

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