2018 Prediction Season
It's already been a pretty wild ride. And it could get even wilder. Coming around the final turn into the home stretch of 2017, it looks like a full-bore stock market gallop to the finish line.
And exactly no one saw this huge moneymaking run coming. Do you know how many analysts said, at the end of 2016, that the S&P 500 could possibly hit 2,500 this year? What about 2,400? Anybody got 2,400? Actually, there was one analyst out there who called for the S&P 500 to hit 2,425...
On December 14, 2016, a very astute and handsome analyst for Angel Publishing wrote:
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.
It's true, my call for S&P 500 2,425 was the most bullish prediction out there. And I missed by a mile. At least if you consider 8.2% a mile. That's the nature of the predictions biz. It's tough out there, folks. Still, every year, investment banks, analysts, and stock market gurus line up to admit they cannot see the future; nevertheless, here's what stocks will do next year.
Now, I'm going to tell you something most others will not: You actually can predict the future with a high degree of certainty.
How to Be a Stock Market Guru
Now, if you don't want to be a stock market guru, I get it. It's not for everybody. So if you'd rather I keep doing the guru-ing and tell you what's gonna happen next, I am happy to oblige.
But if you do, there are a few simple rules you will need to follow. One, corporate earnings. Earnings are the lifeblood of the stock market. When earnings are growing, companies hire people to make more stuff to sell in order to ride the wave. Companies will also raise dividends, buy back stock, and pay more in taxes, all of which helps keep the bull ball rolling. (Bull ball? Makes no sense.)
Conversely, when corporate earnings are falling, people get fired, dividends get cut, tax rolls fall, investments stop, and there you have it: bear market.
Ignore the Fed, pay no attention to China or North Korea, and absolutely forget who's living in the White House. None of these things matter. Get a handle on where corporate earnings are headed, and 60% of your guru-ing is done.
Two, know your history. Robert Shiller won a Nobel Prize for his CAPE valuation thingy. His idea was to use a 10-year average P/E ratio to determine if the market is expensive or not, because a long-term average smoothes out the volatility. Right now, the CAPE is at about 35 or something, which is very high. Shiller will tell you to be very careful because the market is extremely overvalued.
If you just saw "Nobel Prize" and "10-year average P/E blah, blah, blah," you might think, "Oh, this Shiller guy must know what he's talking about." And maybe in his Princeton classroom he does. But in the stock market? Yeah, no. Not a guru.
The CAPE P/E sounds smart, but it's actually a dumb idea. Smoothing out the P/E ratio is NOT helpful.
Because you can't see the trend. Besides, P/E ratios rise in bull markets because P/E measures what HAS happened, while stock prices measure what investors think WILL happen.
Before the dot-com bubble blew up, the S&P 500 traded at a P/E of 35. Expensive, yes. But you know what? The S&P 500 will trade that high again. It will also trade down to 12 or so one of these days. That's how history works. If you can accept the fact that history will repeat (or at least rhyme), then you have a good template for what is possible.
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Like, I've been bullish since 2010. Every month for the last 84, I've told my Wealth Advisory subscribers that we will continue to buy quality stocks for the portfolio. Why? History...
Fact 1: Median U.S. GDP growth: 4.2%
Fact 2: U.S. GDP growth since 2009: 2.6%
Conclusion: There is upside for economic growth and earnings.
Sometimes it's that simple. In fact, it usually is.
The final thing any good guru pays attention to is sentiment. How are people feeling? What are they expecting?
Remember how the Fed was gonna spark runaway inflation? How Trump was gonna tank the market? How Obamacare would crush the economy?
The ONLY fears that matter are the ones that can cause people to spend less money. Does anybody cancel dinner plans because the Fed is buying mortgage bonds? Repeat after me: Fear is bullish.
As for the current market, are you ready to say the economy is cooking and there's a ton of opportunity for both workers and investors? No? Bullish...
How I Trade
I like to make fairly inexpensive short-term trades using weekly options. Plunk down $200–$300, and I will typically know pretty quickly whether or not I have a winner.
It's pretty easy to catch a 50% gain with this strategy; you just need a ~2% move for the stock. Sometimes I catch a big one...
On Monday, I grabbed 30 Bank of America calls at the $27 strike price for $0.09 each. The total was about $280 with fees.
Yesterday, BofA launched 4% higher. I sold 10 of these calls early in the day for $0.27 and the final 20 around $0.70. The total take was ~$1,600.
That worked out pretty well. I'm running out of space here today to fill in more details of how I trade. But I'll get more into the nitty-gritty in the next few Wealth Daily articles.
Until next time,
A 21-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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