Even among the cheeriest of market outlooks for 2023, the one predicting that the Dow will hit 38,000 to 40,000 in the next 12 to 18 months is certainly an attention-grabber.
But that’s where Neil Hennessy, the founder of Novato, Calif.-based Hennessy Funds and the company’s chief market strategist, is putting his money, so to speak.
Hennessy was not present at his company’s 15th annual press luncheon in New York City Wednesday because he was undergoing back surgery, but the firm's chief investment officer, Ryan Kelley, explained that Hennessy’s prediction is based on strong economic fundamentals that have been overshadowed by “noise.”
For instance, consumption is still strong, he said. “Employment has no cracks yet, and that continues to be a good part of the overall economic fundamental outlook,” Kelley said. “And most importantly, there’s cash. There’s cash everywhere. We see $7 trillion in cash on the balance sheets of S&P 500 companies. We see $10 trillion sitting in money market and fixed-income funds. We see $18 trillion with consumers as money in the bank. Two years ago, that earned nothing. Now that cash is productive even if you leave it in the bank.”
Meanwhile, Kelley continued, U.S. equities look very good from a risk/reward standpoint, as companies continue to increase dividends and buy back stock. Earnings growth is still positive, though it has slowed, and at less than 17 times earnings, the Dow and the S&P seem to be more reasonably priced than they were over the last few years.
“So Neil’s call of 12 to 18 months, 38,000 to 40,000, which is about a 12% to 16% increase from where we are right now” is totally doable, Kelley said.
The big question is: How does the market get there?
Certainly, Kelley said, geopolitical issues, supply-chain issues and a potential railroad strike all are possible inflationary events. “We think that’s going to continue to worry the markets, continue to drive the markets throughout next year,” he said.
But there have been some real bright spots. For instance, the energy sector has risen 69% this year, even though tech is down 25%, Kelley said.
“In 2022, we’ve seen a large disparity of returns. There are some sectors that are completely outperforming and then there are others that are completely underperforming,” he said. “If you look at the three major indices, the Dow is down only 5% for the year, Nasdaq is down almost 30% for the year, and the S&P is about halfway between, down 16%.”