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Market Predictions 2017

Written by Briton Ryle
Posted December 12, 2016 at 6:28PM

It's less than two weeks until Christmas. And in three weeks, we will be ringing in 2017. My daughter is halfway through her junior year of high school — time is just flying for me...

Last year, I did my "Predictions for 2016" piece right after Thanksgiving. So naturally I had to wait until mid-December to do Predictions 2017.

So, I hope you know the drill: First I review my 2016 predictions. Then in my next article, coming this Wednesday, December 14, I will unleash Predictions 2017 on the world. And you, dear Wealth Daily reader, will get it all first, right in your inbox...

Review: Predictions 2016

1. The S&P 500 will hit 2,275. This one may sound familiar because that was my target for the S&P 500 in 2015. It was based on earnings per share of $127 for the S&P 500. But as we know, 2015 earnings per share are coming in much lower than that, around $109 to $110.

Right now, I'm seeing 2016 earnings per share estimates for the S&P 500 between $119 (Goldman Sachs) and $132 (Standard & Poor's). As I've noted before, estimates are usually around 10% too high, and they get revised lower as the year progresses. So we could reasonably peg earnings at $115 to $120. And that would represent ~10% earnings growth for 2016.

Clearly, my 2,275 target suggests that S&P 500 earnings will be better than $115 to $120.

Correct: So, the S&P 500 has hit an all-time high of 2,259 as of Friday, December 9. The discerning reader will note that 2,259 is actually not 2,275 at all. But here's the thing: I'm taking credit anyway. Because it seems inevitable that the Trump rally is not done. If we don't see 2,275 on the S&P 500, I will acknowledge my complete failure as a human right here on Wealth Daily

2. Oil trades as high as $70 and energy stocks return to profitability. Energy stocks were a huge drag on the market in 2015. The sector singlehandedly lowered S&P earnings per share by more than 10%. But I say 2016 will see oil rally into a new trading range between $55 and $70 and energy stocks are the best performers in the S&P 500 (yeah, you should buy some U.S. oil stocks).

The Saudi market share "experiment" has been among the dumber things I've ever seen. They are losing around $100 billion a year in oil revenue. They have already sold bonds to make up budget shortfalls, and the IMF says they will be broke in five years if they stay on the current path. Why keep losing money? 

Wrong: Dang it, oil has made it back into the range I predicted, between $55 and $70. And I suppose there is still time for a move to $70. But it doesn't seem likely. And since I took credit for my S&P 500 target prediction, I'm gonna put this one in the "loss" column. 

3. Inflation returns. Mel Brooks told us that no one expects the Spanish Inquisition. And while that may be true, I'd say even fewer people, the Fed included, expect inflation to pick up. After all, negligible inflation has been the hallmark of the slow growth recovery since the financial crisis. Increased productivity and the Internet are deflationary forces.

However, the U.S. labor market is actually getting kind of tight. Wages have shown some incremental improvement. There's not enough supply in the housing market. And I expect oil and gasoline prices to rally. These all have the potential to push inflation rates up.

The Fed has long wanted to see some inflation come back into the system. 2016 is the year they get it. But I don't think the Fed will raise rates to fight inflation per se. Rather, the little bit of tightening we get will simply get rates off the floor, say to 1.5% to 2%.

Wrong: Now, it's true that inflation has improved this year, especially wage inflation, which is the Fed's favorite measure. But inflation is still not hitting where the Fed would like it, so I gotta take my lumps on this one, too. 

4. Gold rally! You just can't have some inflation without a rally for gold. Look for gold to rally back to the $1,300 level. Just about every gold mining stock will double in price. 

Correct: I pretty much nailed this one. Gold prices traded above $1,300 an ounce, and every gold stock doubled. 

5. Emerging markets get no relief (and may get a crisis). This is the one that's troubling me. I don't see China's GDP growth picking up, and that spells trouble for natural resource-based emerging economies.

I continue to think that China's massive infrastructure build was one of those one-time events I spoke of earlier. And the effect on commodity prices was also a one-time thing. So if your economy was geared toward feeding the Chinese economic machine, well, that's a problem.

And when you add in the amount of dollar-denominated debt that emerging economies have ($14 trillion, according to the IMF), the prospect of a continued strong U.S. dollar and higher U.S. interest rates is worrisome.

I'd put the odds at 50/50 that we get some kind of emerging market economic crisis in 2016, similar to what happened to the Asian Tigers in 1997. And like any financial crisis, it will be a very good buying opportunity. 

Correct: Yes, emerging markets stocks have done OK this year. But that's not a statement about the economies. It's simply a matter of liquidity. Central banks around the world have kept the money pumps running, and some of that loot has gone to emerging market stocks. But the economies have not gotten relief. 

6. American boots on the ground in the Middle East. At some point, enough of this ISIS crap is going to be enough. I'm not generally a fan of American military intervention, but these lunatics are calling the U.S. to action. I would expect that any military action would actually come under NATO or the UN. But it's time for our soft talk on ISIS to give way to the big stick.

Wrong: No big stick, and it's too bad. Don't get me wrong; I am actually fine with the U.S. leaving the Middle East to tend to its own affairs. But I don't consider ISIS a "Middle East" problem. That bunch of lunatics is a global problem. 

7. President Hillary. This shouldn't come as a shock given what the party of Abe Lincoln has come to. It's a disaster. Ronald Reagan wouldn't recognize it. Any truly moderate conservative has been run off. And that's a shame, because American politics works best with two viable parties keeping each other in check.

Wrong: *Cough* ahem *cough*... I actually don't mind missing this one. A year ago exactly no one thought Trump could win this election, including Trump.

8. Once again, GDP can't beat 3.5%. This one shouldn't come as a surprise and doesn't need any explanation. Growth just isn't going to blow the doors off. For the last two years, the first quarter has been horrible, and that's kept a lid on full-year growth potential. Yeah, it's always something...

But here's an idea: Rather than look at the economy as "broken," maybe it would be better to look at it as "in transition" as the Boomer generation leaves the workforce. Slow and steady doesn't sound so bad in that context.

And maybe we wouldn't feel such a need for someone to "do something" if the perpetual tepid growth is simply a result of an economy "in transition."

Correct: Predicting U.S. growth under 3.5% is the easiest prediction there is. And guess what? I'm going to make it again for 2017. And it's not because I don't think there will be growth — there will. And we may well see a quarter or two come in above 3.5%. But a full year? Not gonna happen. 

4 for 4 is Not Bad

I don't know what they tell you about the prediction biz, but batting .500 is pretty darn good. At least for me. Anyway, I'll be back with eight amazing and shocking predictions on Wednesday, December 14. You do NOT want to miss it...

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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