Monthly Archives: December 2016

2016 Forecasts: Naughty Or Nice?

1234December 27, 2016

Every year, very intelligent and well compensated market professions try to figure out the direction of the market. Most major Wall Street firms then publish such forecasts. Creating a record of your forecast can be a risk, because time will eventually reveal its quality.

The end of the year strikes me as good time to grade the people who made market predictions for 2016. This exercise is not meant to discredit anyone, or any firm, but I have learned that looking at these forecasts can be a good way to learn. So let’s look at the list of who was naughty (those who had a poor call on the market) and who was nice (those who actually got it right).

First, we should remind ourselves of how we started this year. At the end of 2015, the S&P 500 stood at 2043. The market in 2012, 2013 and 2014 had given investors very good returns, but 2015 posted a meager return of just a bit over 1%. Not surprisingly, the pundits were looking for grey skies to continue in 2016. Here are some of the 2016 predictions that major Wall Street firms made at the start of the year.

JP Morgan and BofA Merrill Lynch both called for the S&P 500 to end the year at 2000 (a decline for the year!). The team at Credit Suisse was forecasting a positive return, getting the market all the way to 2050. Others firms were crowded around the 2100 level including Stifel, BMO, and Goldman Sachs. Citibank came in at 2150, while a more optimistic tone was seen at Morgan Stanley and UBS, both predicting 2175. The highest and most bullish call was made by the Barclays team, stretching the goal line to 2200. Just as a reminder, we started at 2043.

You might remember that January 2016 turned out to be one of the worst trading months the market had ever faced. The S&P 500 went down, and eventually hit 1810, before it finally stopped in mid February -11.4% for the year. At that point, even those predictions of 2000 seemed overly optimistic.

The market began to rally in late February and just kept going up, reaching new all time highs. As of this past Friday, the S&P 500 closed at 2263, up in price 10.7% for the year. Regarding the Barclays 2016 predictions done in late 2015, one of their analysts wrote: “Our macro narrative is simple, if obvious. We believe US interest rates will go up [they got that right] leading to a strong dollar [right again] this should cause earnings per share growth.” Hence their positive outlook for a 2200 call.

Since this Weekly’s edition comes at the end of a year in which most of Wall Street predictions have been exposed as being simply wrong, next week we will be looking at what the market experts believe is in store for 2017 in our “Predictions Issue.”

Carl Gambrell

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A Bubble Bursting While Markets Soar?

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December 19, 2016

Here are four simple rules that can often explain economic conditions:

Rule one: when the economy is strong the Fed will tend to raise rates, conversely when the economy is weak the Fed will tend to lower rates.

Rule two: when the economy is strong and jobs are being created, consumers will spend money because they are comfortable in the belief that they will not be fired.  Conversely when the economy is weak consumers cut back for fear that their job or pay might be cut.

Rule three: when a country is raising its rates, its currency is typically strong.

Rule four: when an economy is strong, stocks go up in price and bonds go down in price as yields are rising.

These four simple rules explained everything that happened in the market last week.  The biggest news was the Fed’s Open Market committee decision to raise short term rates by 25 basis points, marking only the second increase since the financial crisis of 2009.  In addition, the Fed indicated that it expects to raise US interest rates three more times in 2017.  I love a Fed that gives you their playbook well in advance.

Following the Fed’s announcement the US dollar continued its rally and reached a 14-year high versus a basket of other key currencies.  Currency movements are obviously key drivers of competiveness across the globe.  Some countries have manipulated their currencies in the past in order to make their products more competitive.  Per our simple rule we know that when a country is raising interest rates, its currency tends to be strong.  With three rate increases expected in 2017, the dollar probably stays strong near term.

Since the Presidential election, the yield on the 10-year US treasury note has moved over 1% higher, reaching as high as 2.639% at one point last week.  Global bond investors have seen an estimated $1.45 trillion decline of market value as yields have risen.  Market pundits are starting to say that the bond market bubble is beginning to burst.  One thing is certain: when a market experiences a $1.45 trillion negative move some people are experiencing some financial pain. One area suffering pain this week was the emerging markets.  Many small countries have debt tied to US interest rates and to the US dollar.  The combination of a strong dollar and rising US rates will not be good for some of these smaller emerging markets in the short term.  It was also reported that investors had taken $17 billion in money out of the emerging markets.

In spite of all this, the US equity markets flirted with all time highs as the Dow Jones Industrial Average danced around the 20,000 level.  Most all of the week’s events were consistent with the four simple rules outlined above.  If the economy and job growth continues to improve, we can probably expect more of the same.

Carl Gambrell

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