Neil Hennessy hasn’t met a stock market he didn’t like.
Omicron remains bullish on Hennessy shares, even amid a significant drop in the market on inflation fears, interest rate hikes, supply-chain disruptions and the severity of the new COVID-19 variant.
The founder, president and chief market strategist of mutual fund firm Hennessy Advisors (HNNA), which manages $4 billion in assets, presented his market outlook for 2022 during a press conference in New York on Wednesday.
In November 2017, when the Dow Jones Industrial Average stood at 23,837, Hennessy predicted that the benchmark would cross 30,000 within two years. He was locked up for only three months. Last December, when the Dow closed at 29,884, he predicted the index would reach 35,000 this year.
On November 8, the Dow reached an all-time high of 36,566.
The benchmark is down 5.4% since then and the Nasdaq Composite Index is down 6.9%. A drop of 10% is considered an official correction.
But that doesn’t phase Hennessy. He estimates the Dow will reach 40,000 in the next 18 months.
He has good reason to be “Permabull” in a bull market that ends his 13th year. Since March 9, 2009, when the market hit the bottom of the 2008 financial crisis, the Dow has posted an annual return of 17%. Also, there has been an increase of 198% in corporate earnings during that period. And despite the instability of the pandemic, the US economy continues to grow.
Hennessy compares the current market to the Great Bull Market from 1980 to 2000, which experienced only one year, 1990. Even in the current bull market, there has been only one down year, 2018.
Over the entire 41-year period, which includes the 1987 crash, the popping of the dot-com bubble, the post-9/11 market and the 2008 fiscal crisis, the Dow has had an average of only seven down years. Total return of -9.2%.
Meanwhile, the average total return for 34 positive years is 18.2%. During that period, the Dow experienced seven corrections of 10% or more. The average number of trading days it took for the market to recover was 131. After a 37% drop in March 2020, it took 193 days (6.4 months) for the market to return to its previous peak.
Hennessy quickly pointed out that the move to 40,000 would not be straightforward. He expects significant volatility. Between still rising taxes, the worst inflation rate in decades, the new deadly form of COVID-19, the “great resignation”, supply-chain issues and disrupted technologies, he sees incredible resilience in the market.
“Go behind the headlines and look at the fundamentals,” Hennessy said. “There’s still a lot of cash sitting on the sidelines.”
As of November 29, $6.8 trillion sits in bond funds and ETFs, and $4.6 trillion in money market funds, according to the Investment Company Institute, a fund industry trade group. Meanwhile, $7.1 trillion in cash sits in the books of companies in the S&P 500 index, according to Businesshala.
The Dow Jones Industrial Average currently pays a dividend yield of 2.02%, which is a full 50% higher than the 1.34% yield on US Treasury 10-year bonds. At that rate, it doesn’t pay to hold the bond.
For those who think the stock market is overpriced, Hennessy said the Dow’s annual earnings-per-share growth for the five years ended Sept. 30 is 12.3%, which supports current market multiples.
Other positive factors include strong forecasts for GDP. According to Businesshala, GDP for 2021 is forecast for growth of 5.5% and for the next year to grow by 3.9%. Other factors include rising corporate profits as the economy reopens and a healthier banking system. He added that interest rates remain low, despite the Fed’s recent comments. Employment also remains strong, with just 210,000 new jobs this morning missing analysts’ expectations of 550,000 in print despite November’s jobs report. However, the unemployment rate fell to 4.2%.
According to Businesshala, Hennessy sees the market growing with strong merger and acquisition activity, rising dividends, more stock buybacks, a fair price-to-earnings ratio of 18 and a price-to-sales ratio of 2.5. In the end, he said that there is no enthusiasm in the market, a phenomenon that usually precedes a bear market.
Well, there is definitely no excitement in the market this week.