The only certain thing about a prognostication is that it will be wrong. Keeping that humble thought in mind, we offer our readers our initial thoughts on the markets’ trajectory for 2017, which of course need to be adjusted as the quarters of the year unfold and market action interacts with policies and politics and of course the unexpected. From the very start we should state that there are reasons to validate both a bullish and a bearish narrative. The majority of the analysts expect that the end of 2017 will find us at a higher level for the S&P 500.
Our position can be summarized in four letters: POCH (Prudently Optimistic Cautiously Hedging). However, before we explain our position, let’s quickly review some important optimistic facts which we will contrast them with some important bearish facts:
-Central banks have been supporting the markets (both equity and debt markets)
-Corporate earnings are on an upswing again
-Expectations were risen after the Trump victory for tax cuts, deregulation, repatriation of cash, and for some fiscal stimulus
-Consumer and business confidence as well as investors’ sentiment have been lifted higher
-The wealth effect seems to be at work (at least in the US), affirmed by the Dow Jones Transportation Average, and the Russell 2000 Index, both of which indicate another possible bull market
-Credit markets show signs of strength as projected by pertinent spreads
-Capital spending projections show some good signs of revival
-Commodities depression is abating
-Production estimates are on the rise
-Disposal incomes are rising and unemployment is dropping
-Even European economies are projected to record a growth rate of about 1.5%
-Stock buybacks are projected to remain healthy
-Emerging markets seem to be recovering
-Technological improvements point to higher growth trajectory
Here are some fundamental facts that make us cautious:
-The total debt levels (national, corporate, and household) around the world are very high and deficits are projected to start rising again
-The inverted pyramid of derivatives is simply a weapon of mass destruction (as Buffett proclaimed it)
-The monetary easing has created capital misallocation and inflated paper assets
-Rising interest rates will affect negatively valuations and possibly earnings
-Equities seem to be overbought and multiples are quite high
-European elections in March (Netherlands), April/May (France), June (possibly Italy), and September (Germany) may infuse significant uncertainty into the markets
-Anti-free trade sentiment is a self-defeating mechanism where trade restrictions lower growth and incomes’ prospects
-The Great Wall of Steroids (Chinese bubbles, non-performing loans, slower growth, and capital flights) may shake up the markets again
-Dollar shortages and dollar appreciation could create issues especially in emerging markets that have debts in dollars
-Legislative and policy implementation gaps
-Unfunded liabilities at a time of an ageing population in the developed world
In conclusion and after evaluating the above we should differentiate between a trading strategy (1-6 months perspective) and an investment strategy (up to 18 months perspective). For a trading strategy we would say that the positives seem to carrying the day, and therefore we believe that for the short term the equities market has upside potential. However, any capital deployment needs to seriously consider what kind of hedging strategy it also deploys since preservation of capital for prudent investors should be goal #1.
An Initial Market Outlook for 2017: Part I
Author : John E. Charalambakis
Date : January 3, 2017
The only certain thing about a prognostication is that it will be wrong. Keeping that humble thought in mind, we offer our readers our initial thoughts on the markets’ trajectory for 2017, which of course need to be adjusted as the quarters of the year unfold and market action interacts with policies and politics and of course the unexpected. From the very start we should state that there are reasons to validate both a bullish and a bearish narrative. The majority of the analysts expect that the end of 2017 will find us at a higher level for the S&P 500.
Our position can be summarized in four letters: POCH (Prudently Optimistic Cautiously Hedging). However, before we explain our position, let’s quickly review some important optimistic facts which we will contrast them with some important bearish facts:
-Central banks have been supporting the markets (both equity and debt markets)
-Corporate earnings are on an upswing again
-Expectations were risen after the Trump victory for tax cuts, deregulation, repatriation of cash, and for some fiscal stimulus
-Consumer and business confidence as well as investors’ sentiment have been lifted higher
-The wealth effect seems to be at work (at least in the US), affirmed by the Dow Jones Transportation Average, and the Russell 2000 Index, both of which indicate another possible bull market
-Credit markets show signs of strength as projected by pertinent spreads
-Capital spending projections show some good signs of revival
-Commodities depression is abating
-Production estimates are on the rise
-Disposal incomes are rising and unemployment is dropping
-Even European economies are projected to record a growth rate of about 1.5%
-Stock buybacks are projected to remain healthy
-Emerging markets seem to be recovering
-Technological improvements point to higher growth trajectory
Here are some fundamental facts that make us cautious:
-The total debt levels (national, corporate, and household) around the world are very high and deficits are projected to start rising again
-The inverted pyramid of derivatives is simply a weapon of mass destruction (as Buffett proclaimed it)
-The monetary easing has created capital misallocation and inflated paper assets
-Rising interest rates will affect negatively valuations and possibly earnings
-Equities seem to be overbought and multiples are quite high
-European elections in March (Netherlands), April/May (France), June (possibly Italy), and September (Germany) may infuse significant uncertainty into the markets
-Anti-free trade sentiment is a self-defeating mechanism where trade restrictions lower growth and incomes’ prospects
-The Great Wall of Steroids (Chinese bubbles, non-performing loans, slower growth, and capital flights) may shake up the markets again
-Dollar shortages and dollar appreciation could create issues especially in emerging markets that have debts in dollars
-Legislative and policy implementation gaps
-Unfunded liabilities at a time of an ageing population in the developed world
In conclusion and after evaluating the above we should differentiate between a trading strategy (1-6 months perspective) and an investment strategy (up to 18 months perspective). For a trading strategy we would say that the positives seem to carrying the day, and therefore we believe that for the short term the equities market has upside potential. However, any capital deployment needs to seriously consider what kind of hedging strategy it also deploys since preservation of capital for prudent investors should be goal #1.