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Market Predictions 2017, Part II

Written by Briton Ryle
Posted December 14, 2016 at 7:35PM

Let me start my stock market predictions for 2017 with a statement about predictions.

A lot of investor-types will tell you that predictions are a worthless exercise, that anyone who claims to be able to predict the future is lying to you. The critics will say that making predictions is bad for your bottom line, because if you're wrong, you will lose money. And a person is likely to be wrong when trying to plan an entire year ahead of time.

Of course, if you're RIGHT — like I was on gold and the S&P 500 in 2016 — you make a lot of money...

Still, the enlightened critic will say it's better to react to the market that's in front of you than to impose predetermined notions on the market. To this I say: duh. 

Just because I make predictions about what an asset or the market will do over the next year does not mean I'm putting it all on Twitter stock on January 1 because THIS is the year it gets bought out, damn the torpedoes (and for the record, I do think Twitter gets bought early in 2017, and no, that's not a groundbreaking expectation). 

Exercise is never bad, be it physical or mental. What's more, I make better investment decisions when I am in tune with the market. That means taking in data and trying to figure out what it might mean. And when I'm wrong, I learn. I also want to be in tune with sentiment. It's always good to have a feel for what the masses are expecting and not expecting. 

Because how stocks react to expectations is probably the single most important indicator there is. It's very hard to know if news is really important until you see how it affects prices. There are endless examples of this — like the Brexit vote or Trump's election win. Both were thought to be very bearish, but both sparked powerful rallies. 

And speaking of Trump, he is the biggest challenge for predictions. We know so little about what he will do as president that it's tempting to make his future policies the focal point of this article. But the fact is, the economy and stock market have inertia of their own, and it's difficult for a president to really change the course.

With all that said, let's get to it...

Predictions 2017

1. The S&P 500 will hit 2,425 (but don't expect it to finish the year there). Might as well get the toughest one over with first. I'm seeing S&P 500 earnings estimates between $124 a share and $130. Right now, 2016 earnings are expected to come in around $108 a share. So analysts are expecting a pretty big jump for earnings in 2017.

Why? Well, oil stocks will help. They've been a drag on earnings for two years. Now, with oil prices up, they can contribute on the positive side. And then there's Trump...

Analysts are already pricing in a corporate tax cut to 18–20%. And with Republican control of the government, this will likely happen. 

At $130 a share, the 2,425 level commands a P/E just shy of 19. I think this is doable.

Expectations are already running high. That can certainly carry over to the early stages of policy actually being enacted. As in there will be enthusiasm if Trump goes after taxes first — stocks will rally more. But will overall policy be enough to sustain stock prices all year? This is where I have doubts. 

Earnings estimates for the year ahead are always about 10% too high. Even if we get a boost to earnings from tax cuts, the S&P 500 will likely not hit $130 in per-share earnings in 2017. And if Trump really gets aggressive on the trade front, earnings could be impacted.

What if China retaliates against U.S. companies? GM is in the news today, as China has opened a probe. China can easily dent earnings for companies like Apple, Ford, and Starbucks.

So, I think we see a rally in the early going of 2017, with market highs coming in April/May. Then we get volatility in the second half and finish 2017 below the 52-week high. 

2. Oil trades between $50 and $75. I think this one can be answered with a simple observation: Saudi Arabia wants to sell part of its oil company, Aramco, in an IPO. Will it make more with oil at $50? Or at $70? Exactly. 

3. Gold rallies back to $1,300 in the second half. I know, I know, gold is very oversold right now. But with enthusiasm for stocks in the early going, I don't see a strong rally coming for the barbarous relic. Sure, a dead-cat bounce is likely soon — use it to lighten up. Don't expect a sustained move higher until late summer/autumn.

4. Just two rate hikes, both in the first half. I believe Yellen wants rates higher. And she finally has a window of opportunity. Look for two more quarter-point hikes in the first half of 2017. But then the economic data starts to weaken, and Yellen has to stand down and go back to the "data-dependent" stance the Fed has had for the last year. 

5. Emerging markets plunge in second half. Are you getting the feeling that I'm not excited about the second half of 2017? Look for emerging markets to do OK in the first half of the year, as better oil price and general good vibes help. But higher interest rates and weak EU growth weigh in the second half. Emerging markets still hold trillions in dollar-denominated debt and loans. These get more expensive as U.S. rates rise. Some real fear about markets in the second half brings volatility and a rally for gold.

6. Yuge tech rally. Yeah, so, I'm going Trump again. Tech companies have a stupid amount of cash overseas. And investors will push the stocks of Apple, Microsoft, Cisco, and other large-cap techs up on the prospect that $1 trillion of cash stashed overseas will be brought home. Cisco might even pay out a special dividend to cover up its lack of growth. I also think we will see a slowdown in usage numbers for Facebook, which will hit the stock hard. 

7. Utilities and REITs lag (but with one major exception). These two sectors were market leaders for the last couple of years. And I have been very vocal that distributed power is hurting the utilities. Rising rates will also hurt. The select REITs that I've recommended to my Wealth Advisory readers have been amazing. And we will hold most of them, because we have terrific gains, and the dividends are also terrific. But for the most part, I don't think they do so well in 2017. Except for one segment of the REIT sector, where I think higher stock prices are a lock. Care to guess what it is? 

8. Once again, GDP can't beat 3.5%. As I told you on Monday, predicting U.S. GDP growth under 3.5% is a slam-dunk. So yeah, I'm padding my prediction stats with this one. And no, I don't feel at all guilty about it. 

OK, there you have it. Once again, my predictions are in stone! Oh, and the REITs that I think will do well are the data center REITs. You're welcome.

Until next time,

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Briton Ryle

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An 18-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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