- Dow Jones Industrial Average (DJIA) futures jumped 111 points on Thursday, extending yesterday’s stock market rally.
- But Wells Fargo analyst Chris Harvey struck a negative tone, citing four major risks facing the market.
- Retirement funds, the Federal Reserve, growth expectations, and political risk are all headwinds going into 2020.
Dow Jones Industrial Average (DJIA) futures were up 111 points premarket on Thursday, pointing to another strong start on the stock market. But analysts at Wells Fargo are growing increasingly cautious about the year ahead.
Speaking to CNBC, Wells Fargo Securities analyst Chris Harvey warned of four critical headwinds facing the Dow and S&P 500.
We’ve been looking more at the negatives than the positives… [First], 401(k)s. You look at my dad, you look at my mom, they’ve got to take money out of their 401(k)s. If you look at the Fed. At some point this QE / ‘not QE’ is going to end. We’ll have less liquidity at the beginning of next year. And more importantly, I think people’s expectations for growth are just too high at this point in time. We need to ratchet things down. And we haven’t even talked about the political risk.
Dow futures up 111 points
Dow futures contracts jumped 111 points in early trading Thursday, extending yesterday’s monster rally. Sentiment remains strong despite China’s silence on the current status of US trade relations.
Risk 1. Boomers cashing out 401(k)s
As Harvey explained, an entire generation of wealthy Baby Boomers are heading into retirement in the coming years. With the stock market at record highs, they’re going to start cashing out their 401(k)s, putting huge selling pressure on the stock market.
This isn’t just an equities problem. As CCN.com reported, Boomers are set to sell a quarter of all real estate over the next 20 years as they downsize and move to retirement homes.
Risk 2. Federal Reserve liquidity drying up
In October this year, the Federal Reserve announced a bond-buying program. They began purchasing $60 billion of Treasury bills per month with a view to extending it into mid-2020.
Fed's balance sheet at $4.05 trillion, highest level since Jan 9, up $293 billion over the last 3 months.
"This is not QE." – Jerome Powell pic.twitter.com/sfVGgVq0du
— Charlie Bilello (@charliebilello) December 2, 2019
The Fed argues this is not quantitative easing (QE) but it does expand the Fed’s balance sheet and inject liquidity into the market. When that dries up in the second quarter of 2020, there could be an adverse effect on the market.
Risk 3. Expectations for stock market growth are too high
Harvey went into further detail on this point, explaining that some analysts have a rosy view of corporate earnings growth going into 2020.
For all of 2020, estimates are still too high. I think you’re looking at zero to five percent growth next year and people are up in the high single digits at this point in time, so they do have to come down.
Risk 4. Political risk threatens Dow
Overshadowing each of these issues is the macro geopolitical environment. Threats come in any forms. From Trump’s ongoing trade war with China to the 2020 presidential election to the never-ending Brexit debacle.
Despite all this risk, Harvey said Wells Fargo isn’t expecting a stock market decline next year, just muted growth.
We don’t see a down year ,but we don’t see a whole lot of great opportunity to the upside.