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My 2016 call for the S&P 500 to drop 10% to 15% occurred within the first month of last year; stocks spent the rest of the year recovering until they rallied strongly after the election. That's a fancy way of saying that my year-end call was wrong by a long-shot. I thought growth would be slow and that the Federal Reserve would move slowly to raise rates, both of which were true. But markets surprised me by shrugging off signs of economic stress as well as the Brexit vote and rejection of the Italian constitutional referendum.
2016 was a year of surprises – and no doubt we'll see a few in 2017, too.
But after doing a good deal of studying and thinking, I've finalized my market outlook for the next 12 months.
- Here's my 2017 target range for the S&P.
- Here's where I think bonds are headed.
- Here's my complete currency forecast.
And last but not least, here's my new list of recommendations for 2017 – both on the long and the short side.
We're in for a wild ride this year. There is more policy and geopolitical uncertainty than ever.
- S&P 500 Year-End Range: 1,800/2,400
- Euro Range: $1.00-$1.07
- Yen Range: 110-130
- 10-Year Treasury Range: 85%-3.25%
- S. Real GDP Growth: 2.4%
Rather than produce a year-end target for the market for 2017, which is like shooting darts at a sparrow, I am forecasting a range for the S&P 500 of 1,800/2,400, which equates to ~20% downside and ~7% upside from the closing level of 2,238 on Dec. 30, 2016. This range is somewhat wider than last year's 52-week trading range of 1,810/2,277 on the upside because we are starting about 200 points higher than we did a year ago. I expect more volatility this year based on much greater policy and geopolitical uncertainty, though central banks will keep suppressing volatility as much as they can.
My range is tilted to the downside because stocks are fully valued based on non-GAAP earnings and overvalued based on GAAP earnings. Traditional measures tell us that the S&P 500 is trading at ~22x trailing earnings and ~18x forward earnings, ~125% of GDP and ~28x Shiller Cyclically Adjusted Earnings (70% above their long-term average). These are high multiples by any measure, and I think higher earnings and higher multiples are going to be difficult to come by over the next 12 months. Yet markets keep demonstrating that they can trade higher because they are driven by sentiment and machines rather than fundamentals. But sentiment can vaporize in the blink of an eye, and machines can make mistakes. I prefer to stand on solid ground. And an over-indebted global economy and geopolitical fracture zones do not constitute solid ground in my book.
I do not believe that policymakers can perpetually delay the day when the market starts trading on fundamentals once again. The Federal Reserve is in the early stages of withdrawing unprecedented support for secur…
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.