Dow Futures on Edge but JP Morgan Predicts 2020 Bonanza for Stocks

  • Dow Jones Industrial Average (DJIA) futures were broadly flat on Tuesday, struggling to hold Monday’s stock market highs.
  • US-China trade remains in focus after White House reached “consensus” on phase one deal.
  • Long-term outlook is positive as JP Morgan predicts a “great rotation” back into stocks in 2020.

Dow Jones Industrial Average (DJIA) futures took a minor slide by 11 points in premarket trading Tuesday, pointing to a nervous stock market open. Traders are struggling to hold yesterday’s record highs, despite a breakthrough trade deal “consensus” overnight.

Looking to the longer-term picture, JP Morgan is bullish on the year ahead. The bank’s analysts see a flood of money entering the stock market next year in what they call a “great rotation.”

Given this year proved to be a strong year for equity markets, helped by institutional investors, then we should see retail investors responding to this year’s equity market strength by turning [into] big buyers of equity funds in 2020. This suggests 2020 could be another strong year for equities driven by retail rather than institutional investors.

Dow futures struggle for direction on Tuesday

Dow futures contracts swung in and out of positive territory overnight as traders digested a seemingly positive phone call between Washington and Beijing.

Dow Jones Industrial Average (DJIA) futures were indecisive on Tuesday morning. Source: Yahoo Finance

S&P 500 futures and Nasdaq Composite futures also traded flat. Bitcoin rose back above $7k to hit $7,180.

Stock market rally to continue into 2020

The Dow is already up 19% year-to-date, mostly driven by institutional money, according to JP Morgan. In contrast, retail investors have taken an “extremely cautious stance” and sat on the sidelines.

But with the stock market closing out the year 19% higher at record highs, retail investors will come running. JP Morgan analysts predict they’ll rotate out of defensive bonds and into equity funds.

Dow Jones: “path of least resistance is up”

JP Morgan’s optimistic stance was echoed by HG Research’s Hans Goetti this morning. Speaking to CNBC he said the stock market’s “path of least resistance is up,” and will keep pushing higher on the back of central bank easing.

For now, there’s no need to change any strategy… The main reason our equities are going up has to do with central bank policies. Don’t forget the Fed has cut rates three times since June. It has also added $280 billion to its balance sheet with interventions in the repo market. That’s another 50 basis points cut effectively.

Goetti expects central bank easing to continue into 2020, helping support the stock market at record high levels.

Focus remains on US-China trade deal

The Trump administration reportedly “reached consensus” with China over the phase one trade deal this morning. Chinese Vice Premier and chief negotiator Liu He spoke with US Treasury Secretary Steven Mnuchin to hash out the last major sticking points.

Earlier this week, China committed to cracking down on intellectual property violations – a significant compromise in the ongoing negotiations.

The biggest barrier to signing the phase one deal before December 15th appears to be the extent to which Trump will agree to roll back tariffs. Liu He remains “cautiously optimistic” that a consensus will be reached before the year is out.

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