Top 3 Predictions For The Market In 2017
Some major themes have developed in the market this year that will carry over into 2017 and change how investors will profit in the market. Bret Jensen shares his top three strategies for which stocks will win and which will lose in 2017.
The third quarter has officially wound to a close. The market has managed to grind its way up as the Federal Reserve has once again punted on raising interest rates ahead of the upcoming presidential election.
Stocks have done well considering the dollar is much stronger than it was a year ago, worldwide economic activity is at its lowest ebb since 2009 and profits have fallen within the S&P 500 for five straight quarters and if the consensus holds true, the third quarter will run that streak to six. The domestic economy also remains firmly stuck in the weakest post-war recovery on record, more than seven years after the recession “officially” ended in June of 2009.
While most pundits are busy working on their forecasts or asset allocation strategies for the fourth quarter, I would like to get a jump on looking out to what 2017 is likely to deliver for the economy and the markets. Here are three predictions for the coming year.
The Fed Will Remain Largely On Hold:
It almost seems comical now that the Federal Reserve projected late in 2015 that they would raise interest rates by a quarter point four times in 2016 before a spike in volatility across global markets knocked them off that perch in the first quarter of this year. At best, we might get one quarter point hike for 2016 in December, and that is a 50/50 proposition.
The truth is the central bank should have started to raise rates in late 2014 or early 2015 when the global economy was growing at a faster clip. Now with the European and Japanese central banks engaged in negative interest rate policies in a misguided attempt to boost growth, the Fed’s hands are largely tied. It can’t raise rates more than a smidgeon without spiking the dollar. This would have myriad negative impacts that Mrs. Yellen and the rest of the Fed would like to avoid. Interest rates are likely to remain lower for longer than most envisioned a year ago. This will be bad for banks and insurers and this is why I will continue underweight financials in my portfolio.
Oil Is Not Spiking Anytime Soon:
Crude oil prices popped Wednesday on news that OPEC has agreed to its first production freeze in eight years and will start in November. However, oil still is stuck in the roughly the $40 a barrel to $50 a barrel range that it has traded within for months. The United States has become the “swing” producer for the global oil markets and rig count here is already starting to tick back up. If oil goes much above $50 a barrel, production here will start to ramp up again.
In addition, and as stated above, global demand remains weak and is likely to remain so throughout 2017. Finally, with Saudi Arabia and Iran battling for influence in the Middle East, there is likely to be some “cheating” around these new quotas.
Eventually, the huge cuts in capital budgets at oil and mining concerns that have resulted in the cancellation or postponement of hundreds of billions of dollars of long-term projects will result in a supply squeeze. However, this will probably not happen until 2018 at the very earliest. It is hard to see a huge spike in oil next year. Therefore, I continue to be underweight energy and materials within my portfolio.
Since fuel costs will remain low at least through 2017, some transportation and leisure stocks look like good values here. These include both Delta Airlines (NYSE: DAL) and Southwest Airlines (NYSE: LUV) as well as Norwegian Cruise Lines (NASDAQ). All of these companies should continue to benefit from lower fuel costs. Their stocks also sell for substantially below the overall market multiple and all have seen some significant buys by insiders in recent months.
Earnings Growth Will Remain Hard To Come By:
The double-digit earnings growth forecasts for the S&P 500 that exist right now should be taken with a huge grain of salt. IE, they are probably not going to happen. As stated above, the third quarter is likely to be the sixth in a row that profits within the S&P 500 have fallen on a year-over-year basis.
The domestic economy remains stuck at the two percent growth levels that have existed throughout what is officially a “recovery” but does not feel like one for a good portion of the country. In addition, neither presidential candidate has shown the focus or will to tackle the regulatory, tax, and structural reforms necessary to get growth moving again along the trajectory of previous recoveries. Both are against additional trade agreements which could bolster growth as well. The best case scenario, therefore, is that we continue to muddle along at a very slow growth rate.
The sad part is the United States continues to be the best house in a bad neighborhood. Europe is barely above stall speed and Japan keeps going in and out of recession. China insists it is growing near their “official” seven percent growth rate targets, but no one really believes that. The WTO just knocked down global trade growth projections by a third to just 1.7% for 2016. Global trade has been growing at one and a half to two times the rate of global growth over the past two decades. Now it is growing at less than the anemic worldwide growth levels for the first time in 15 years.
With a dearth of growth throughout the economy, companies that can continue to churn out both revenue and earnings growth should be increasingly valued by investors. I personally like large biotech concerns like Amgen (NYSE: AMGN) and AbbVie (NYSE: ABBV) who sell for below market valuations, continue to show growth and sport nice dividend yields. I also like the homebuilders
I also like the homebuilders like Lennar (NYSE: LEN) or Toll Brothers (NYSE: TOL) that are selling considerably under the overall market multiple and should capitalize on the improving housing market to produce revenue and earnings growth in the low to mid-teens
Finding biotech stocks with upcoming catalysts for explosive growth like Xencor (up 87%), Artana Therapeutics (up 63%), and many more is a key component of my comprehensive strategy for massive profits in my newsletter, Biotech Gems.
Positions: Long ABBV, AMGN, DAL, LEN, NCLH & TOL
Category: Stocks
