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Aug. 24, 2019, 1:30 p.m. EDT

Trump claims the stock market would be higher if he hadn’t confronted China — is he right?

If the trade war is successfully resolved, the Dow could rise to 30,000 points

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By Nigam Arora

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Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.

Fundamentals

By now you may be thinking that technicals are supporting Trump, but what about the fundamentals? When the Dow Jones Industrial Average was at 16,000, I was laying out a scenario for Dow 30,000. I have repeated that call several times. As an example, please see “Here’s the case for Dow 30,000 in Trump’s first term.”

Here is a quote from one of my prior writings: “The biggest single factor in the long-term direction of stocks is earnings growth. The current consensus for S&P 500 Index’s operating earnings are $133 per share. According to the Arora Report’s analysis of Trump’s proposals, tax cuts could add about $13 to S&P 500 earnings. Deregulation could add another $7. If gross domestic product growth were to accelerate to 4%, S&P 500 earnings could reach as high as $190 by the end of Trump’s first term. Given the potential growth in the economy, in spite of the Federal Reserve’s plan to raise interest rates, the price-to-earnings (P/E) ratio may stay in the range of 18 to 21. A P/E of 20 applied to $190 in earnings leads to 3,800 in S&P 500. (The benchmark index is now at around 2,351.) For the Dow Jones Industrial Average, that translates to reaching over 33,450 by the end of 2021, Trump’s first term.”

Investors ought to note that the U.S. economy is about 70% consumer-based. The U.S. consumer remains strong, as evidenced by better-than-expected earnings from Walmart /zigman2/quotes/207374728/composite WMT +0.48% , Home Depot /zigman2/quotes/208081807/composite HD +0.84% , Lowe’s /zigman2/quotes/205563664/composite LOW +1.05% and Target /zigman2/quotes/207799045/composite TGT +2.12% .

What to do now

Start with Arora’s Third Law of Investing and Trading: Making investing and trading decisions based on probabilities is the only realistic and profitable approach.

If the trade war is successfully resolved and the resolution isn’t “soft,” the probability is better than 70% that the stock market will hit 30,000 in Trump’s first term. However, the probability of a good resolution of the trade war, in our analysis at The Arora Report, is only about 25%.

If the trade war is not resolved and a Democrat other than Biden such as Warren or Sanders starts leading in the polls, the probability is better than 50% of a several thousand point drop in the Dow.

The situation is further complicated by the shenanigans of the central banks and trends toward negative interest rates. I have previously written “The U.S. stock market is like a drunken party — stay for a while but know when to leave.” This is the reason that investors should follow a proven adaptive model with a successful track record in both bull and bear stock markets. An example of such a model is ZYX Asset Allocation Model. In plain English, adaptive means a model that automatically changes with market conditions. Under present market conditions, static models that have previously worked may not work now because market conditions have changed.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.

/zigman2/quotes/207374728/composite
US : U.S.: NYSE
$ 129.97
+0.62 +0.48%
Volume: 5.52M
Aug. 7, 2020 4:00p
P/E Ratio
24.72
Dividend Yield
1.66%
Market Cap
$368.07 billion
Rev. per Employee
$223,654
loading...
/zigman2/quotes/208081807/composite
US : U.S.: NYSE
$ 271.64
+2.27 +0.84%
Volume: 2.85M
Aug. 7, 2020 4:00p
P/E Ratio
27.00
Dividend Yield
2.21%
Market Cap
$292.16 billion
Rev. per Employee
$261,993
loading...
/zigman2/quotes/205563664/composite
US : U.S.: NYSE
$ 152.78
+1.59 +1.05%
Volume: 2.90M
Aug. 7, 2020 4:03p
P/E Ratio
25.79
Dividend Yield
1.44%
Market Cap
$115.35 billion
Rev. per Employee
$230,029
loading...
/zigman2/quotes/207799045/composite
US : U.S.: NYSE
$ 131.75
+2.74 +2.12%
Volume: 2.30M
Aug. 7, 2020 4:02p
P/E Ratio
24.42
Dividend Yield
2.06%
Market Cap
$65.88 billion
Rev. per Employee
$209,322
loading...

Nigam Arora is an engineer, nuclear physicist, author, and entrepreneur and the founder of two Inc. 500 fastest growing companies. He is also the developer of the ZYX Change Method to profit from change by investing. The premise is that most money is made by predicting change before the crowd. Arora is the chief investment officer at The Arora Report and the editor of four newsletters that track the ZYX Change Method. Nigam can be reached at Nigam@TheAroraReport.com

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