Special Report: 2017 Market Outlook

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.

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.

Now let's get started on market predictions. Before I give you my predictions for 2017, I'm going to first review my 2016 picks. 

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 single-handedly 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 Out of 8 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. Now, on to my predictions for the market in 2017...

2017 Market Predictions

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? Data Center REITs.

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. 

Well, there you have it. My market predictions for 2017 are set in stone, may they provide my readers with profound insight and glorious profits. 

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