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Looking Ahead at 2020:3 Drivers of a Likely Wall Street Rally

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Wall Street is on the verge of completing a fabulous 2019 after a pathetic 2018. This year, the U.S. economy and stock market touched several milestones. In March, Wall Street bull run completed 10 years. Historically, this is the longest bull run of the U.S. stock markets. In July, the U.S. economy entered the historically longest 11th year of expansion. All three major stock indexes reached several fresh highs.

However, the question is, will this dream run continue in 2020. Though experts are divided on their opinion, here we give three reasons as to why the Wall Street rally may continue next year.

Stable Economy and Corporate Profit to Support Higher Stock Valuation

The three major stock indexes – the Dow, the S&P 500 and the Nasdaq Composite – gained 22%, 28.5% and 34.8%, respectively, with just a day of trading left for this year. Many industry experts have said that it will be difficult to sustain this level of valuation in 2020.

However, a stable U.S. economy is likely to be a cushion for the country’s stocks. The U.S. GDP growth is over 2% despite being its in the 126th month of expansion and completing a calendar decade without recession for the first time in history. Strong consumer spending, which constitutes 70% of the GDP, a strong labor market, historically low-level of unemployment, steady growth of wage rate will bolster investors’ sentiments.   

The two major drawbacks were weak business spending and lower corporate profit. However, these were the fallout of a lingering trade conflict and tariff war with China. A possible interim trade deal with China in early January is expected to boost business confidence and profits.

Scrapping of proposed tariffs, rollback of some tariffs imposed earlier and an agreement on intellectual-property disputes along with strong enforcement provisions and a substantial hike in agricultural imports by China will pave the way for growth. Our current consensus estimate indicates an acceleration in earnings growth from 2020 and beyond.

Fed to Support U.S. Economic Expansion

The Federal Reserve, which was largely blamed for the stock market rout in December 2018 due to its ultra-hawkish stance, quickly corrected itself in 2019. After remaining quite in the first half of 2019, the central bank reduced the benchmark interest rate by 75 basis points in three equal trenches after the trade talk broke abruptly in May and government yield curve inverted in August fearing an impending recession.

Fed’s timey intervention not only boosted the economy and raised investors’ confidence, it also helped the sagging U.S. housing market to recover with a low mortgage rate. Moreover, the central bank has adopted quantitative easing program through accelerating the growth of its balance sheet.

The Fed chair has reiterated his commitment to do whatever needed to support economic expansion and not raise interest rate until the inflation rate, which is currently at just 1.6%, crosses the Fed’s target level of 2%.   

Globally U.S. Stock Markets Are the Best  

The U.S. stock markets are the best destination for investors. During the post-recession era, overall returns of U.S. stocks were nearly four times higher than the rest of the world. After successfully recovering from the great recession, Wall Street recovered overwhelmingly from the trade-related assault of 2018.

The gigantic size of the U.S. economy has given it a clear upper hand over emerging markets. Furthermore, geopolitical conflicts are not going to harm United States as much as the rest of the world. Technological innovation and superiority has always been a strong pillar of U.S. economic strength.   

Wall Street witnessed a broad-based rally in 2019. In addition to the three major stock indexes, which predominantly constituted of large-cap stocks, the S&P 400 mid-cap index soared 24.3% so far this year. The Russell 2000 Index – the benchmark index for small-cap stocks – jumped 22.7% and the S&P 600 small-cap index surged 20%.

The likely signing of phase-one trade deal between the United States and China is expected to boost global economy, which will bolster U.S. exports. Oil prices are likely to rise owing to higher demand and the United States will be the major beneficiary of higher oil prices. The government yield curve is currently firmly northbound and bond market-induced recessionary fear is overblown.   

How to Pick the Right Stocks

At this stage, several stocks are available which looks attractive for future growth. However, selecting three criteria will make the task easy. First, select large-cap (market cap more than $50 billion) stocks which has stable business model and are regular dividend (income stream) payers.

Second, these stocks have skyrocketed in 2019 and still have strong upside left reflected by a long-term (3-5 years) growth rate of above 7%. Third, each of these stocks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy) and has a VGM Score of A or B. You can see the complete list of today’s Zacks #1 Rank stocks here.

Five stocks have fulfilled our selection criteria. Here are those: Target Corp. TGT, Costco Wholesale Corp. COST, The Sherwin-Williams Co. (SHW - Free Report) , Raytheon Co. RTN and Northrop Grumman Corp. NOC.

The chart below shows price performance of five stocks in the past year.

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