Money Morning Members who’ve been with us a while will remember my 2016 Forecast, when I called for the S&P 500 to drop 10% to 15% and predicted Marco Rubio would be headed to the White House.
Well, stocks hit my predicted target in the first month of 2016… and then spent the rest of the year recovering and rallying until well after the election Donald Trump won.
That’s a fancy way of saying I was wrong, by a long shot. Now, in my free service alone, I made 14 very profitable long and short stock recommendations. But instead of the crash I expected and markets frankly deserved, we got an endless rally, albeit one totally divorced from economic fundamentals.
Investors shrugged off Brexit, Donald Trump, and the Italian constitutional referendum; disguise wholesale capital destruction as “stimulus,” distribute it cheap-as-free worldwide, and you’ve got one helluva market drug.
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That said, I may be the only guy currently in financial media who can honestly and freely admit that he was wrong. I’ve never shied away from making tough calls and holding people (including yours truly) accountable.
That’s always been true, and that’s the one thing that won’t change in 2017.
Stocks, on the other hand, are in for quite a year. And passive, complacent investors could have a very rough time. I’ll give it to you straight, right now, in my official outlook…
Here’s Where Stocks Will Go in 2017
Giving a target for stocks in 2017 is like shooting darts at a sparrow. Rather than do that, I’m forecasting a range for the S&P 500: 1,800/2,400.
This 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 next 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 in fact overvalued based on GAAP earnings.
Traditional measures tell us that the S&P 500 is trading at ~22 times trailing earnings and ~18 times forward earnings, ~125% of GDP, and ~28 times 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 it’s what I want for my readers. And an over-indebted global economy and geopolitical fracture zones do not constitute solid ground in my book.
Now, I do not believe that policymakers can perpetually delay the day when the market starts trading on fundamentals once again.
It’s practically inevitable.
Central Bankers Can’t Take Us Much Higher
The Federal Reserve is in the early stages of withdrawing unprecedented support for securities prices, but the European Central Bank and Bank of Japan are still manning the monetary pumps. This behavior is not only far beyond the appropriate mandate of central bankers but is 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.
Mark my words: 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.
The Royal Bank of Canada, for instance, just came out with a 2,500 target for the index.
For its part, Goldman Sachs is looking for the S&P 500 to hit 2,400 in 2017, although the investment bank may be “talking its book,” considering how many of its ex-bankers just landed jobs in the new administration.
No doubt the Barron’s survey of top strategists will show these and other “oracles” fighting to come up with the highest price target, and not a single one calling for any decline whatsoever.
Consider that every president who succeeded a two-term president in recent history saw a recession early in their first term, and you can see how these over-optimistic strategists are setting their clients up for disappointment and subpar returns in 2017.
In any case, I’m sure we won’t hear from Goldman or RBC or any of the rest of them in 2018 when they turn out to be dead wrong. One of my readers, Jerry, wrote, “[It’s] so refreshing to see someone post both his winners and losers – almost no one does.” So you can bet I’ll give it to you straight either way.
Stock profits in 2017 will go to those who take an active role, like I recommend here, as well as in my Sure Money and paid Zenith Trading Circle services. They should handily beat a passive approach.
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