Neil Hennessy said we’re still in a bull market and the Dow Jones Industrial Average will soon hit 30,000. He was speaking at the Hennessy Funds 12th annual market outlook in New York Wednesday. The Dow closed Friday at 27,875.
As one of the market’s perma-bulls, Hennessy never predicts a down year. But with only one down year in the last decade, he’s got the numbers to back it up. In November 2013, when the Dow stood at 15,900, he predicted that the average would hit 20,000 within the next five years.
Less than four years later it hit 20,000. When that happened in 2017, he said, “We’re on our way to 30,000” And today, the Dow is only 2,125 points away.
“That [20,000 prediction] wasn’t a real big leap,” acknowledges Hennessy. “And you’ll see my prediction this year isn’t a real big leap either. Interestingly, the fundamentals just kept getting better and better and better. And they are still getting better.”
The chairman and chief investment officer of the Hennessy Funds, which celebrates its 30th birthday this year, said people come up to him all the time and ask, “Is the bull market long in the tooth? Is it over?”
“No,” said Hennessy, “It’s not over.”
While he believes the market will hit 30,000 over the next few years, he warned that there would be market corrections along the way.
Since 2010, the Dow has experienced 22 pullbacks and 16 of them were drops between 5% and 10%. Those 16 took an average of only 35 trading days to recover lost ground. The other six pullbacks sank between 10% and 20%. But they only took an average of 120 days to regain their losses.
He said all the headlines about Brexit, China, Hong Kong, and Washington are just noise.
“People pay too much attention to the noise,” said Hennessy. “But, it has nothing to do with the fundamentals of the companies in the stock market.
He said there is still a ton of cash sitting on the sidelines. Bond mutual funds and ETFs have $5.3 trillion under management.
“And they are earning virtually nothing,” said Hennessy.
Money Market funds hold $3.5 trillion.
“Earning virtually nothing,” Hennessy repeated.
On top of that, the companies in the S&P 500 Index have $5.3 trillion in cash and marketable securities. Finally, the companies of the Dow have $1.7 trillion in cash and marketable securities.
Hennessy broke down the case for being a bull. In addition to all the cash, the economy continues to see steady, but not robust, growth with moderate inflation. Corporate profits continue to increase; cash flows are at all-time highs. Interest rates are low. Unemployment is at 50-year lows; wages are rising. The banking system is strong and consumer confidence is still very strong, though waning.
“I’m an economic realist,” said Hennessy. “When I look at the amount of cash sitting on the balance sheets, there is plenty of cash for buybacks and raising dividends.
“People also ask me, ‘where is the market going to go if it hits 30,000?’,” he said. “It’s going to 35,000. I’m sure that didn’t surprise you. The reality of the situation is that the fundamentals are so strong you can’t stop it.”
Finally, the most important factor, he said, was that Market Euphoria typically precedes a bear market.
“We don’t have euphoria in the stock market,” he exclaimed. “Until we get euphoria in the marketplace, you won’t see a bear market, but you will see pullbacks.
Hennessy Funds runs two Japan mutual funds and the CIO also gave a bullish outlook for Japan and gave credit to tourism.
In 2018, a record 31.2 million people visited Japan, spending a record 4.5 trillion yen making up 7.4% of the country’s gross domestic product (GDP).
“Japanese equities are currently trading at compelling valuation levels compared to other developed equity markets around the world,” said Hennessy.
The Hennessy Japan Small-Cap Fund (HJSIX) is one of the firm’s best performers. For the first nine months of this year, the fund was up 9.4%, compared with its benchmark, the Russell/Nomura Small-Cap Index, up 8.4% through Sept. 30. The 10-year annualized return was 11.7% compared with the benchmark’s 7.75%. The fund charges an expense ratio of 1.47%.