Market Predictions 2018: Part II
My brother graduated from Tulane University in 1988. He made it in four years. If you know anything at all about New Orleans, you know that's a pretty remarkable feat.
At the time, I was planning a move to Colorado to go skiing for a couple years. So we decided to take a road trip in his 1973 Karmann Ghia to do a little recon and camping in the Rocky Mountain National Park. I can tell you the roads in Western Louisiana and East Texas are absolutely the worst. I swear the highway turned into a dirt road at one point...
I didn't have any music with me, so I bought a Master of Puppets cassette at a New Orleans music store. I tormented my brother with it every time it was my turn to drive.
I forgot my sleeping bag, but I figured it was late May in the Rockies — I'd be fine. Yeah, no. It's still cold. We hit an Army Navy outlet in Colorado Springs so I at least had a blanket.
Trail Ridge Road is the highest continuous highway in the U.S. It runs from Estes Park to Grand Lake. The snowbank must've been 10 feet high — skiers were jumping the highway.
At the ranger station in Grand Lake, you have to give the rangers an itinerary of where you're going to camp so they have a place to start looking for your remains if you get eaten by bears. We had no plan, so we winged it. Pointing at the big map on the wall, we said, "We'll stop here the first night. And then we'll go here, and eventually spend a couple nights here..."
It seemed cool, until the ranger asked if we had ice axes and crampons. We looked down at our sneakers. Uh... no? Apparently the snow line was only a couple thousand feet higher than the ranger station. I figured it would be a good idea to keep the whole "forgot my sleeping bag" thing to myself. Still, as we headed out, I'm pretty sure they preemptively stamped our permit with "Eaten by Bears"... you know, to save time.
I don't really remember how far we hiked. Half a day, maybe, before we hit snow too deep to pass. "This looks like a good spot." It really was a beautiful spot — beside a creek, tucked in between high cliff walls. To prove my camping prowess, I packed in a carton of raw eggs to cook (or give to the bears). We had a little one-burner Campingaz stove and two cans of gas from the surplus store.
The sound of doom can take many forms. This time it was a hissing sound after I screwed the burner thingy into the can. We'd lost the gasket that sits between the can and the burner thingy, and so we lost nearly a full can before getting it unscrewed. Nothing left to do but scour the campground. Amazingly, we found the tiny rubber gasket. Hard-boiled eggs never tasted so good.
Now, like I said, we camped in a little woodsy canyon. The cliff walls were so high, you couldn't see what was coming weather-wise. Weather can change fast in the Rockies. And after about four days, the sun dimmed as clouds started rolling over us. Within minutes, it started snowing. Light at first, then the temperature dropped and it started snowing harder. Was it just a flurry? Was there a big storm coming? We couldn't see what was coming. Our weather forecast was accurate for about 45 minutes...
A quick conference, and we agreed that getting eaten by bears was maybe a little heroic, but we didn't want to die in a spring blizzard in the Rockies. That's just dumb. So we broke camp in the snow — and started running.
The snow lasted maybe another hour. By then we were below the snowline, and we laughed at our panicked flight down the mountain. But when you can only see the next hour's worth of weather, it's not easy to get it exactly right...
Last week I gave you Part I of my 2018 predictions. This week I present you with Part II.
1. The S&P 500 will hit 3,000. Might as well start off with a bang. Yeah, I'm calling for another year of bull market. And the S&P 500 to 3,000 is not as wacky as it sounds. I'm calling for an 11% gain. And I expect it happens because of a nice combination of earnings and optimism.
The S&P currently trades with a trailing P/E of 25 and a forward P/E ratio of 18. Yes, both are above the 10-year average. But here's the thing: Last year at this time, the trailing P/E for the S&P 500 was 24.9, basically right where it is now. So I say if earnings come in basically as expected ($145 per share), then we can easily hit 3,000.
So, why will earnings post another year of 10% growth? There's the boost from a corporate tax cut. But we also have a really great global growth story going on right now. And the U.S. economy is accelerating. We likely won't post much over 3% growth in 2018, but even getting near that number is a vast improvement.
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We've been living with the post-crisis stress syndrome for a decade. The future has looked bleak, we worry. I get the sense that is finally starting to change. People who have dropped out of the workforce are coming back. Homes sales are up. There are more IPOs. There are some great investment trends: automation, electric cars and batteries, AI, cryptocurrencies. Optimism might be just getting started.
2. Oil does not break above $75. Better global growth will help demand a little. But efficiencies in shale production will keep a lid on price. Saudi Arabia is not willing to make the dramatic cuts that will really lift prices. Russia will not cut anymore. So production will stay basically where it is, and that means oil prices do, too. The only reason I see a possible move to $75 is the ever-present "tension in the Middle East."
3. Gold's range for 2018 is $1,050–$1,350. Gold is right in the middle of its 10-year range. And with my expectation for an overall good year for the economy, I just can't get to the bullish scenario for gold. Plus, cryptocurrencies like Bitcoin are offering competition in the alternative asset space. I think gold rallies early in 2018 — sell that rally.
4. Two rate hikes from the Fed. We've got a new Fed Chair coming in. It's highly unlikely he will immediately hike rates. But as the economy expands and the employment rate stays low, rates will have to rise. Let's say one in June and one in September.
5. 2016 U.S. GDP growth hits 3%. Yep, I say animal spirits have been unleashed — Americans come out of their funk and start feeling better about the future for the first time in a long time.
6. Bitcoin hits $25,000. Right now, Bitcoin and other cryptocurrencies have no utility. No one will spend it, because who wants to be the dumbass that buys $100 million pizza? If you really think Bitcoin has a future, then you want these wild swings to stop. You want it stable. Because then people might actually use it as a medium of exchange.
I think we see the price spikes continue for the first part of the year. But eventually, I see the price stabilizing... somewhere? OK, the standard rule for a bear market is the 61.8% pullback. From a $25,000 top, that projects to $10,000. Oh, a nice round number... See how easy that was? Ultimately, I'd say Bitcoin comes off a $10K floor and stabilizes around $12,000.
7. Tech leads again, followed by financials. Trends in tech are really gaining steam. Chip stocks are actually pretty cheap. Microsoft is likely to break above $100. What's not to like? Bank stocks are gonna love a couple rate hikes coupled with a strong economy and housing market.
8. I don't get eaten by a bear. I need eight predictions, and I need a win.
OK, that's all I've got for 2018. I'm headed to Mexico for Christmas. I'll be back here at Wealth Daily in the New Year!
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 is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
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