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Monday, December 30, 2019

Dow Jones Industrial Average Fell as a Good Stock Run in 2019 Is Ending - Barron's

All three major stock indexes closed lower in the second-to-last trading session of the year. Illustration by Michael George Haddad

Small Setback. All three major stock indexes closed lower in the second-to-last trading session of the year. Still, 2019 has been a strong year for stocks and the S&P 500 is on the edge of finishing its best annual run since 1997. Tesla (ticker: TSLA) delivered its first batch of Model 3 electric cars built in its new Shanghai Gigafactory 3 plant, but the stock fell 3.6% on Monday. At the same time, Chinese electric-car maker NIO (NIO) saw its American depositary shares soar 54% after the company reported better-than-expected financial results. In today’s After the Bell, we...

  • wonder if the S&P 500 will finish 2019 with more gains than in 2013;
  • watch the yield curve continue to steepen as recession fears fade;
  • and speculate if 2020 will see stock valuations shrink with all the good news priced in.

Best Year in Two Decades?

All three indexes posted minor losses on Monday after hitting all-time highs last week. The Dow Jones Industrial Average declined 183.12 points, or 0.64%, to 28,462.14. The S&P 500 dropped 18.73 points, or 0.58%, to 3221.29, and the Nasdaq Composite has lost 60.62 points, or 0.67%, to 8945.99.

Stocks had been on a tear in December, and now sit well positioned to post the best annual gains in more than two decades. If the S&P 500 closes above 3,248.87 by the end of tomorrow—a 0.86% gain from Monday’s close—the index will beat 2013’s 29.6% gain, marking the large-cap index’s best calendar-year performance since 1997, when it surged 31%. Today’s retreat has made that a little less likely to happen.

Sentiment is upbeat in the bond market as well. The spread between the two-year and 10-year Treasury yields has widened to 33 basis points on Monday, marking the widest gap since October 2018. The steep spread is quite incredible, especially considering that just four months ago in August, the 10-year yield dipped as much as five basis points below the two-year yield—a “yield-curve inversion” that is conventionally seen as a potential signal of a recession. With the Federal Reserve cutting interest rates three times this year, however, the bond market seems to be indicating that the economy has steered away from the downturn for now.

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Investors have good reasons to be optimistic about 2020: An initial U.S.-China trade deal is expected to be signed as early as this week, the Fed appears to be dovish, and the economy is showing signs of recovery. The latest piece of positive data: The National Association of Realtors reported on Monday that November’s pending home sales–serving as an indicator for existing-home sales reports in the coming months–increased 1.2% from the previous month, above economists consensus estimates. Compared with Nov. 2018, contract signings were up 7.4%, well ahead of the 4.4% expectation.

Still, some are worried that stock valuations are now too high. The S&P 500 now trades at around 20 times 12-month forward earnings.

“With fiscal stimulus waning, with the FOMC likely done cutting rates, with manufacturing in recession, with some signs of stalling in the jobs market (see unemployment claims) and with global growth still rather abysmal, we cannot justify the market’s current 20x P/E ratio,” writes Merion Capital Group’s Richard Farr. He expects the market finishes 2020 exactly where it is today based on a more reasonable valuation of 18.5 times.

Still, a January selloff might not be as likely as headlines suggest. For the month of December, the S&P 500 is up a solid 2.6%. We’ve noted that when the index gains 2.7% or more in December, it has averaged a 0.9% rise in January—and finished higher just over two-thirds of the time.

Write to Evie Liu at evie.liu@barrons.com

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