The Dow Jones sped higher during the last full trading session before the Christmas holiday. But as investors bask in the self-fulfilling prophecy of a “Santa Claus rally,” Vanguard’s top economist warns that the stock market faces severe risks heading into 2020.
Wall Street’s three major kicked off the holiday-shortened trading week on track to close at new all-time highs.
The Dow Jones Industrial Average climbed 92.9 points or 0.33% to 28,547.99, notching its third straight session gain.
The Dow’s rally was headlined by its heaviest component, Boeing. BA shares surged more than 3.5% after the beleaguered aerospace giant fired its CEO, Dennis Muilenburg.
The S&P 500 rose 0.08% to 3,223.85, and the Nasdaq climbed 0.15% to 8,938.64 to round out a positive day for US stocks.
Not even ugly manufacturing data could stunt the bullish mood. Durable goods orders plunged 2% in November, the biggest decline in six months. Economists had expected an increase of 1.5%, but a massive decline in defense-related orders sapped those predictions. Even worse, October’s data were revised downward (+0.2% from an initial reading of +0.6%).
The Dow and broader stock market seem to be closing an already-spectacular 2019 with a “Santa Claus rally,” but investors shouldn’t necessarily expect those gains to continue in 2020.
That’s according to Joseph Davis, the chief economist and chief investment strategist at $5.6 trillion asset manager Vanguard. Speaking with Bloomberg, he warned that there’s a 50% chance the stock market suffers a correction in 2020. (A correction is a pullback of 10% or greater).
“Financial markets run the risk of getting ahead of themselves,” Davis said. “Across the board, expected returns for most strategies are below trailing three-year returns[.]”
Vanguard believes that stocks are priced for 3% GDP growth, even though most economists expect growth to come in around 2% (and some, like ING’s James Knightley, warn that it could be as low as 1.4%).
Additionally, stock market volatility held at “unsustainably low” levels in 2019, which should change in 2020. The CBOE VIX, a measure of implied volatility, is currently fluctuating below 13 after spiking above 30 in December 2018.
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Last modified: January 22, 2020 11:40 PM UTC