Neil Hennessy hasn’t met a stock market he didn’t like.
Even in the midst of a significant market decline on fears of inflation, interest rate hikes, supply-chain disruptions, and the severity of the new Covid-19 variant, Omicron, Hennessy remains bullish on stocks.
The founder, chairman, 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 Wednesday.
In Nov. 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 off by only three months. Last December, when the Dow closed at 29,884, he forecast that the index would hit 35,000 this year.
On Nov. 8, the Dow hit an all-time high of 36,566.
Since then the benchmark has fallen 5.4% and the Nasdaq Composite Index is down 6.9%. But that doesn’t phase Hennessy. He predicts the Dow will reach 40,000 in the next 18 months.
He has good reasons for being a “permabull” in a bull market ending its 13th year. Since March 9, 2009, when the market hit the bottom of the 2008 Fiscal Crisis, the Dow has posted an annualized return of 17%. Also during that time, corporate earnings have grown 198%. And despite pandemic volatility, the U.S. economy keeps growing.
Hennessy compares the current market to the Great Bull Market from 1980 to 2000, which only experienced one down year, 1990. The current bull market has also only had one down year, 2018.
Over the entire 41-year period, the Dow experienced just seven down years and seven corrections of 10% or more. Yet, the average number of trading days it took the market to recover was just 131. Even after the 37% plunge in March 2020, the market took just 193 days (6.4 months) to return to its previous peak. During the seven down years, the Dow posted an average total return of -9.2%.
Meanwhile, the average total return for the 34 positive years is 18.2%.
Hennessy quickly pointed out that the move to 40,000 won’t be straight up. He expects significant volatility. Still amidst the specter of rising taxes, the worst inflation rate in decades, new deadlier variants of Covid-19, the “Great Resignation,” supply-chain issues, and disrupting technologies, he sees incredible resilience in the market.
“Get behind the headlines and look at the fundamentals,” said Hennessy. “There is still a lot of cash sitting on the sidelines.”
As of Nov. 29, $6.8 trillion sits in bond funds and ETFs, and money market funds hold $4.6 trillion, according the fund industry trade group, the Investment Company Institute. Meanwhile, $7.1 trillion in cash sits on the books of the companies in the S&P 500 Index, according to Bloomberg.
“That means there is still a lot of room to run in this market,” said Hennessy.
The Dow Jones Industrial Average currently pays a dividend yield of 2.02%, a full 50% higher than the 1.34% yield on the U.S. Treasury’s 10-year bond.
“As long as the 10-year bond is below 1.5% people are going to get into stocks,” said Ryan Kelley, Hennessy Funds’ chief investment officer.
For people who think the stock market is wildly overpriced, Kelley, co-portfolio manager of the firm’s Cornerstone Mid Cap 30 Fund (HFMDX), said the market for mid-cap stocks is currently overlooked. “We think midcaps are the place to be: great value, earnings growth, and momentum.”
The fund holds a concentrated portfolio of 30 stocks with market capitalizations between $1 billion and $10 billion and currently focuses on energy and consumer discretionary stocks.
Last year, the Cornerstone fund earned 23.37%, compared with the Russell Midcap Index, which rose 17.1%. Year to date, the Hennessy fund is up 23.28% through Dec. 2, according to Morningstar. The benchmark is up 18.3%.
Kelley said the fund’s price-to-sales ratio is 0.7%, compared to the 2.0% P/S ratio on the index.
As for large-cap stocks, Hennessy said that the Dow’s annualized earnings-per-share growth of 12.3% over the five years ended on Sept. 30, supports the current market multiples.
Other positive factors include strong forecasts for gross domestic product. The 2021 GDP forecast is for 5.5% growth, and for 3.9% growth next year, according to Bloomberg. Other factors include a reopening economy, rising corporate profits, and a healthy banking system. He added that despite the Fed’s recent comments, interest rates still remain low. Employment also remains strong, despite this morning’s November jobs report showing hiring slowed to just 210,000 new jobs, missing analysts’ expectations of 550,000. However, the unemployment rate fell to 4.2%.
Hennessy’s sees the market rising on strong merger and acquisition activity, rising dividends, more stock buybacks, a reasonable forward price-to-earnings ratio of 18, and a price-to-sales ratio of 2.5, according to Bloomberg. Finally, his big reason for continued upside is that there is no euphoria in the market, a phenomenon that usually precedes a bear market.
On that he’s definitely right. There was no euphoria in the market this week.