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WALL STREET INSIGHT

Interruption in recent stock surge very likely in 2020, say strategists

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US stocks finished a volatile week close to record highs, fluctuating with the risk of war in the Middle East and economic data.

US STOCKS finished a volatile week close to record highs, fluctuating with the risk of war in the Middle East and economic data.

A mixed jobs report, the chances of further escalation in US-Iran tensions and the laws of financial gravity are likely to keep a lid on gains this week, despite the prospect of a "Phase One" trade deal with China.

US President Donald Trump's decision to assassinate Iranian military commander Qassem Suleimani prompted vows of revenge from Iran's leadership and an initial stock-market selloff.

After Iran's measured response - striking American bases in Iraq without any apparent attempt to inflict casualties - the stock market quickly rebounded.

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Last Thursday, the Dow Jones Industrial Average came within inches of the 29,000 level, roughly 30 per cent higher than it stood a year ago.

But the Dow fell by more than 100 points a day later after the US Labor Department reported that the US added a relatively modest 145,000 jobs in December and that wages grew at the slowest rate in more than a year.

The shaky jobs report could be a one-off. But economists have warned that it could be too late to reverse the global slowdown triggered by the trade war, even with supportive US Federal Reserve policies and a truce in the trade war.

For now, markets are discounting the risk of further warfare between the US and Iran. Oil futures, which could be weaponised by the Iranian government, briefly traded above US$70 a barrel in the wake of the US strike but fell back below US$60 after Mr Trump gave a speech saying Iran appeared to be standing down further attacks.

The price of gold, which is particularly sensitive to conflict, hit the highest level since 2013 after the Suleimani strike, trading above US$1,600 an ounce, but has since retreated to around US$1,550.

Shares of Boeing, which had weakened in the immediate aftermath of a plane crash in Iran on fears that there was yet another fatal technical issue with Boeing's planes, recouped losses after reports that the plane could have been accidentally shot down by an Iranian missile.

The Iran attack was a jarring start to the New Year, but there is a possibility that it could set the tone.

Every New Year, strategists send clients greeting cards in the form of annual outlooks. This year, many of the notes sounded ominous. The surest path to a bust is, after all, a boom.

And 2019 was a boom year by any standard on the US stock market. Not only did US indexes post some of the highest returns in living memory, the companies that comprise the Standard & Poor's 500 paid a record US$485 billion in dividends last year, according to data analysis firm S&P Global.

The decade-long bull market recalls another era of seemingly limitless stock prosperity, warned Michael Arone, chief investment strategist for the US SPDR unit of State Street Global Advisors, in his annual outlook.

"For most of us, the term 'Roaring Twenties' conjures up the world that F Scott Fitzgerald wrote about in The Great Gatsby," said Mr Arone, in a piece entitled The Big What-If.

"Of course, the giant lawn party came to a screeching halt with the stock market crash of 1929," he said.

The 1920s saw comparable rates of economic growth and innovation with the 2010s, but also saw comparably inflated stock market valuations, said Mr Arone.

"Just like today's market, the 1920s bull market had three key drivers - low inflation, tax cuts and an accommodative Federal Reserve," he said.

Even if there is not an outright bust in 2020, strategists say there will almost certainly be an interruption of the recent surge in stocks.

"Few expect stocks to continue delivering superior returns during the next decade," said Jim Paulsen, chief investment strategist at money manager the Leuthold Group, in a note to clients. "The economic expansion and bull market are simply too long in the tooth and valuations too extended for another decade of solid results."

One factor counting against stocks, Mr Paulsen said, is the statistical law of "mean reversion", which says that short-term spikes are often followed by corrections that bring medium-term index gains back in line with long-term trends.

The main source of optimism last year, a ceasefire in the trade war, could soon be old news, with a signing as soon as this week.

The yuan hit its highest level since the summer against the dollar last week, amid high expectations that the US and China will formalise their trade pact.

There were reports that Chinese Vice-Premier Liu He, who has spearheaded the Chinese end of the talks, is preparing for a trip to Washington for a signing ceremony.

In an uncanny echo of his some- time enemy, former president Bill Clinton, Mr Trump is directing attacks on the Middle East while facing the congressional attack of impeachment.

The odds that Mr Trump will be impeached are shrinking as his economic and foreign policy gambits appear to be paying off.

House of Representatives Speaker Nancy Pelosi, the leader of the Democratic Party in that chamber, formally referred the case to the Senate, clearing the way for the first trial of a sitting president since Mr Clinton was cleared back in 1999.

The impeachment trial is one of many risks that make the relatively smooth ride in markets in 2019 unlikely to continue this year.