2016 vs 2017
In January last year, I wrote a big report called Stocks Wanted for 2016 in which I analyzed the outlook for the stock market and economy for 2016. I thought it would be instructive to look back at what we expected vs what happened and more importantly to update our analysis for 2017. I put the quotes from that article in italics and I put updated analysis and commentary afterward in standard font.
Stocks Wanted for 2016: “I think it is instructive to remember that we here in the 21st century should make sure that we differentiate between the corporate economy and the Main Street/average Joe economy. The good news is that both Main Street/average Joe and corporate cycles are kicking in strongly. Consumers feel richer and more flush than they have in a long time as prices for gas at the pump, electricity and natural gas in the home, food at the store and a lot of other stuff are cheap and getting even cheaper. Employment, while far from great, has been continuing to improve apace. Main Street shops and small businesses even are catching a bit of the positivity in this economic cycle. For 2016, the corporate economy looks like it will continue to grow what already are all-time historic earnings and margins. “
Turns out that was all pretty accurate, as consumers had a strong year and employment continued to improve as Main Street shops and small businesses around the country finally benefitted from the “recovery”. I expect that for the next year or two, as long as rates don’t spike and jar the financial system/government budgets, that we’ll continue to see both Wall Street and Main Street in a virtuous part of the cycle.
Stocks Wanted for 2016: “Part of the big story for the corporate economy in 2016 will be the pain in the energy sector. As energy and commodity prices have crashed, they are now at levels where most fill-in-the-blank (drillers, rigs, pipelines, miners) all have way too much debt to be serviced. I find this recent crashing of oil to $30 rather shocking, even as an oil bear, as I repeatedly predicted for the last year that it would take many years for the oil glut to work itself out long before most analysts had a clue a glut existed. I would expect oil to be range-bound between the low $30s to the low $40s, staying at levels that will force many formerly multibillion-dollar energy companies to file for bankruptcy.”
I was wrong about oil staying in the low $40s, and that extra 20% premium in the commodity means that I was also wrong about there being very many big cap energy stocks going bankrupt. At least for now. I remain mostly a long-term oil bear and I expect there’s still so much oil/natural gas out there that’s now easily re-tapped, that there’s a lid near-term and long-term on oil.
Stocks Wanted for 2016: “Gold likely will trade range-bound from $1,100 to $1,250, which remains at levels that will create a lot of pain in the gold- mining sector, too, as gold miners also as a group have way too much debt.”
Gold is back within the range I expected, but it did run up to $1400 when Brexit and Trump panic were in vogue six months ago. That spike prevented any wave of gold miner bankruptcy but unless gold can get back up near $1400 again this year, there will likely be some serious pain in the gold miner sector.
Stocks Wanted for 2016: “Speaking of debt, let’s talk interest rates. One of these days interest rates will rise to natural levels, which would include a reasonable interest rate for savers and savings accounts and money markets and so on. But, in the meantime, we live in a debt-driven interest rate economy. With central banks around the world continuing their easing policies and causing the U.S. dollar to continue powering higher, the Fed likely will be very slow raising rates in 2016. I’d take the under on two interest rate increases even as most market participants, analysis and economists are expecting closer to four interest rate hikes this year. Overall, that would indicate that we would see a slowly rising interest rate cycle in 2016.”
I nailed that analysis for debt. The Fed and global central banks all kept the rates that they can control remarkably low and the US Dollar had a big year. And my outlook for rates is probably the single biggest difference between my outlook for the stock markets and economy this year vs last year. That is, I tend to think the market will indeed start to move interest rates around the world higher. I do expect that the ever-present demand for US dollars from Petro-dollar demand/reserve currency status will help the US avoid higher rates for this year and maybe next. But I’m much less confident about there being a healthy slowly-rising interest rate cycle in 2017.
On the CFA Panel that I MC’d in Dallas a week ago, I mentioned repeatedly that it’s not just the absolute interest rate that matters, but it’s the rate of change in the interest rate that matters. That is, if we are at a 3.5% interest rate on the 10-Year US Treasury this time next year (vs the 2.5% current rate) that might not be a big deal per se. But if interest rates are still close to 2.5% in nine months and then they spike to 3.5% in three months, that would be a big deal and would probably be the single biggest catalyst for me to turn from bullish to bearish on this ongoing Bubble-Blowing Bull Market that we’ve been successfully riding for the last seven years or so. Stick with Trading With Cody if you want to be ahead of the curve when the turn finally does come and the Bubble-Blowing Bull Market turns.
Stocks Wanted for 2016: “Apple (AAPL) rallies back to $130, but struggles to break above those recent all-time high levels from 2015.”
Was off by a month, but yup. Check.
Stocks Wanted for 2016: “Google, now Alphabet (GOOGL), also powers higher, hitting my $1,000 price target that I put out on it when it was at $250 back in 2011.”
Google got within 15% of my target, but didn’t quite get there. I’d predicted that $1000 price target would hit in 2020, when I first wrote about it back in 2012. With the Bubble-Blowing Bull Market in tact, I wouldn’t be shocked if Google were to hit $1000 this year.
Stocks Wanted for 2016: “Artificial intelligence will go mainstream, which will include seeing several AI-based companies file to go public.”
Check. Glad we bought Nvidia soon after I had written this and before it became an AI darling.
Stocks Wanted for 2016: “Fueled by strong corporate earnings growth and a continued low interest rate environment, the Bubble-Blowing Bull Market that we have been riding for the last five years will continue. Owning the right stocks, as always, will be key, but the path of least resistance for the broader stock markets is higher for 2016. Double-digit gains for the Nasdaq, and technology specifically, wouldn’t shock me.”
Check. Same thing holds for 2017, though I do expect we’ll test some lows and see some panicky 10% pullbacks in the stock market along the way.
Stocks Wanted for 2016: “China’s economy will stabilize and rebound as millions more formerly very poor Chinese citizens move into the middle-class ranks. We’re talking about hundreds of millions of new consumers for smartphones, wearables, Internet media, social networking, and everything else that comes with being a part of the developed world. Hopefully, India can see some middle-class growth of substance, too. As for the Chinese stock market, after this year’s bubble and crash, I wouldn’t want to try to game it. Luckily, we don’t have to. Let’s stick with U.S.-based companies and stocks for the most part.”
Check. And still ongoing as China’s economy grows by virtue of the exploding middle class there.
Stocks Wanted for 2016: “It’s fun, instructive, informative and helpful to lay out some predictions, thoughts and analyses like we just did here. However, as always, being flexible, objective and willing to change our stance, our conclusions, our analysis and our positions will be what separate success from failure.”
Check.
2016 vs 2017 conclusions then: More risks of interest rate spikes means more risk of financial disruptions which means more risk of the Bubble-Blowing Bull Market ending. But the risks of the turn coming this year still aren’t quite enough to make me want to turn bearish and/or hedge too much and/or sell most of my stocks. My own portfolio reflects this higher risk, as I have slightly more cash, more hedges/shorts and slightly less net long exposure than I did this time last year. But not drastically so, as I think we’ve got some great longs that could have huge years this year in the portfolio.
And yes, let’s stay flexible, objective and willing to change our stance, our conclusions, our analysis and/or our positions if we need to.
