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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 securities prices, but the ECB and Bank of Japan are still manning the monetary pumps. This behavior is not only far beyond the appropriate mandate of central bankers but also unsustainable as a practical matter. Those who believe that negative rates (which are governments confiscating their citizens' capital) are either sensible, defensible, or sound will learn an expensive lesson as the mad scientists managing monetary policy turn into modern-day Victor Frankensteins destroyed by their monsters. There will be another financial crisis by 2025 (and likely much sooner) unless radical fiscal reforms are adopted, and such a crisis will cause serious damage to equity portfolios. While I am optimistic about the prospects for better economic policy in the year ahead, I am not convinced that this will transfer into a higher stock market as easily as the consensus believes. I continue to believe that good active managers will outperform passive strategies; the problem is finding good managers who don't get too big for their britches and outgrow the ability to generate high risk-adjusted returns.
Rather than a safe haven, bonds are certificates of confiscation that should be avoided by investors until further notice. Investors counting on capital gains from current levels on high-grade debt are waiting for greater fools to bail them out (most but not all of those fools reside in central banks) or for slow growth or a deflationary debt collapse to drive yields back lower. At current yields, investment-grade bonds offer negative real (i.e. inflation-adjusted) yields. Official inflation statistics understate the actual costs of most goods and services, which means that the low yields on these investments fail to keep up with real-world inflation. If you are paying someone to manage municipal bonds, investment-grade bonds or government bonds, you are not spending your money wisely because it is virtually impossible for anyone to generate real returns on these instruments in the current environment. You should be investing in something else or holding cash. Nobody on Wall Street will tell you this because it is against their interest, so I am telling you this. I don't need to be invited to any Christmas parties. I just end up sitting in the corner talking to myself anyway.
The yield on the benchmark 10-year Treasury started off 2016 at 2.27%, fell to 1.63% in February, rose to 1.98% in March, collapsed to 1.37% in July, and then ended the year at 2.45%. Anybody who tells you with confidence they know where it will trade in 2017 is delusional (or a CNBC contributor). I thought the yield would drop in 2016 because growth would be lousy, and until the election that was a good call. Growth is still lousy, but people think Donald Trump will make it great again so Treasury yields rose sharply post-election (almost doubling since their post-Brexit summer lows). I doubt we'll see anywhere close to 3% real growth in 2017 because it will take too long for new policies to impact the economy and the economy has too much debt. Look for 2017 growth to average 2.4% with a slow start and stronger finish.
A year ago the Fed said it would raise rates four times in 2016; of course it barely squeezed a single hike from its tightly clenched loins. Now the Fed is forecasting three rate hikes in 2017; I am forecasting two. But perhaps my forecast is overoptimistic. As my buddy Peter Boockvar points out, there is $47 trillion of public and private sector debt in America. That means that every 100-basis-point increase in rates causes interest expense to increase by $470 billion, or 2.5% of GDP. That is serious money that could be better spent growing the economy. Instead, it will be paid to bondholders, many of whom reside outside the United States, to keep the wolf away from the door. We've ransomed our economy because our policies favor debt over equity and speculation over productive investment. Hopefully the Trump cabinet understands that and is prepared to change the flawed incentives killing growth.
The U.S. Dollar Index (DXY) rallied to end the year at 102.38. With a 57.6% weighting, the euro exercises the greatest influence on the index. The euro ($1.05) already dropped sharply and could stall out here, although the gravitational pull of parity appears strong. With a 13.6% weighting, the yen (117), which is likely to weaken significantly, has a more limited effect. I would stay short the dollar against both the euro and the yen until further notice. At current levels, the dollar is strong and will negatively impact U.S. corporate earnings in 2017 compared with 2016. But it is with currencies as with religion (with a twist) – there is only one true God, which is whoever each individual chooses to worship, but there really is only one true currency, and that is gold. Paper currencies are killed off by central bankers, but gold endures forever – although its value is subject to the vagaries of human greed and fear. Gold ended the year on a disappointing note ($1.140.70/oz. spot) after starting strongly but remains an investment in monetary disorder and one of the few means of hedging against the persistent destruction of fiat currencies by central bankers and their government partners in crime. Gold is not a "trade," it is an investment against long-term financial insecurity. To the extent they own or transact business in fiat currencies, investors should favor dollars because the dollar remains a stronger currency than the euro, yen, yuan, and all the rest, but they must own gold as a hedge against all of these paper tigers. When you go to church or temple or mosque, pray to God, but when you go to the bank, pray to King Midas and save yourself.
2017 Stock Recommendations
You can see my 2016 report card here. For 2017, I'm updating my watchlist with a number of new stocks – in both the longs and the shorts column – which we'll be tracking in Sure Money over the next 12 months. Here are my recommendations.
|2017 Recommendations (Long)||Symbol||12/30/2016||Comments|
|Belden Inc||BDC||$74.77||Great business|
|Central Fund of Canada Limited||CEF||$11.29||Gold/silver|
|CBOE Volatility Index||VIX||$14.04||Vol will increase|
|G. Willi-Food International||WILC||$5.77||Israeli microcap gem|
|Gentex Corp.||GNTX||$19.69||Strong auto supplier|
|Global X Gold Explorers ETF||GLDX||$20.70||Still cheap|
|La-Z-Boy Inc.||LZB||$31.05||Consistent performer|
|Market Vectors Jr Gold Miners ETF||GDXJ||$31.55||Still cheap|
|Raytheon Co.||RTN||$142.00||Defense build-up|
|Sprott Physical Gold Trust||PHYS||$9.39||Gold|
|2017 Recommendations (Short)||Symbol||12/30/2016||Comments|
|Vanguard Total Return Intl Bond ETF||BNDX||$54.29||Bond bear growling|
|Chipolte Mexican Grill, Inc.||CMG||$377.32||Overvalued|
|Deutsche Bank AG||DB||$18.10||Needs bailout|
|iShares MSCI Europe Financials ETF||EUFN||$18.96||Sector is insolvent|
|Gannett Company||GCI||$9.71||Newspapers are dying|
|GoPro Inc.||GPRO||$8.71||Fad, bad business execution|
|Kadmon Holdings Inc.||KDMN||$5.35||Biotech disaster|
|New York Times Co.||NYT||$13.30||Newspapers are dying|
|Panera Bread Co.||PNRA||$205.09||Overvalued|
|Sears Holdings, Inc.||SHLD||$9.29||Total disaster|
|Tesla Motors, Inc.||TSLA||$213.69||Grossly overvalued|
|Valeant Pharmaceuticals Inc.||VRX||$14.52||Going to zero|
We have an exciting year ahead. Thanks for joining me – and good luck.
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.