Ask five economists and you'll get five different answers—six if one went to Harvard. –Edgar Fiedler
After what occurred in 2016, many forecasters, including myself, are probably considering a new profession. The stock market was supposed to be down, and Hillary Clinton was to be elected president. Neither was to be.
The election reflected a growing trend—populism—that neither media, pollsters, nor forecasters appreciated. After a first half dip, the stock market began to reflect a better-than-expected economy. Additionally, after Trump’s election, the promises of lower taxes and increased infrastructure spending were seen as strong positives for the economy and the stock market. The market results were a complete repudiation of the Super Bowl indicator and the January effect (i.e., a bad January predicts a poor year for the market).
Moving beyond the market and the election, the balances of my 2016 forecasts were a mixed bag:
- “Corporate profits could decline.” They did not decline and are now expected to be up 10-12% for 2017.
- “The Federal Reserve…could defer its march to higher interest rates.” They did defer until December when a quarter-point raise was made in the discount rate.
- “The European refugee crises could have a more negative impact on European economies than first expected.” Growth in Europe has been irregular and Brexit, which I did not even consider, has thrown a loop into the U.K.’s growth prospects.
- “Global growth may stagnate.” In fact, overall growth is estimated to be about 3%, led by more than 4% growth in Emerging Markets.
- “There may be an implosion in the Middle East.” While a single implosion has not happened, Russian entry into the Syrian civil war, acceleration of ISIS terrorist attacks in Turkey and Europe, and tensions between Israel and Palestine all portend worse things.
Despite all of these surprises, the stock market was up nearly 10% for the year, so who can complain? Well, it appears there are a lot of complaints on topics ranging from Trump’s tweets to the controversial new immigration ban and everything in between. Generally, issues like this are not significant to the stock market, but so much uncertainty creates a lot of noise about what is really happening in the economy.
Looking Ahead to 2017
It is easy to make the case that in 2017 the U.S. economy will continue to grow at a reasonable rate, interest rates will gradually rise, and the global economy will stabilize. Yet there remain several unknowns that may prove challenging to a continuing rise in stock prices.
- Growing Populist Tide. The rise of populism is reflective of a populace that is impatient, dissatisfied with the present but uncertain what to do about it, and receptive to political promises (realistic or not). If the likely repeal of the Affordable Care Act (a.k.a. Obamacare) leads to many people being uninsured; if the unemployment status of older white Americans does not change; and if higher import taxes reduce trade, can we expect populism to lead to an even more dissatisfied group?
- Rise of U.S. Dollar. Does the rise of the dollar, already up 26% since its low in 2014, make it even harder for American businesses to compete in global markets and for emerging markets facing repayments of debts in dollars?
- Increasing Global Tensions. We also need to recognize that geopolitical trends are worsening. North Korea, already with nuclear capability, is close to having an intercontinental ballistic missile (ICBM). Additionally, Japan and China are escalating tensions in the East China Sea, China is illegally expanding its presence in the South China Sea, Russia is pushing on several fronts in the Middle East and Eastern Europe, and the tensions in Israel are increasing.
- High Market Valuations. To cap off the above concerns, Balentine’s assessment of the stock market shows considerable upward momentum in stock prices but with already very high valuations.
There is still considerable uncertainty behind policy proposals of the new Trump administration. Of course, the bottom line is how does this all inform investments? Balentine’s 2017 Capital Markets Forecast lays out the roadmap for how we build portfolios for clients to achieve their objectives over time. Recognizing that all forecasts are hazy and always full of surprises, hopefully, this exercise highlights where consensus may be most vulnerable over the short term.
Each January strategists prognosticate what the coming year may bring for markets and the economy. In this vein, Bob Reiser, Senior Advisor to the Investment Strategy Team, publishes his annual forecast. The views expressed herein are solely those of Bob Reiser’s and may not be shared by other members of the Investment Strategy Team, but they do highlight where the prevailing consensus today may be most complacent.