Predictions for 2017

January 3, 2017

Wow!  2016 will be most remembered as the year when every forecaster, predictor, prognosticator, or whatever you want to call them, proved just how wrong they could be.  They missed everything from the rise of global populism to the strong return of the US equity market. No one can claim the 2016 winner’s trophy for forecasting.  Despite this we have decided to forgive but not forget how the experts missed so badly in 2016.  Let’s see what our experts predict for 2017.

US Equity Market Call:

The S&P 500 closed at the end of 2016 at 2238. We have surveyed what fifteen of the largest Wall Street firms predict for this index at the end of 2017.  The average of these forecast is a market increase to 2363 (up 5.5% for the year), with everyone predicting the market will rise. Here are some of the forecasts from most bullish to most bearish:

Oppenheimer                                                           2450

Citicorp                                                                      2425

Barclays, Deutsche Bank, JP Morgan                    2400

BMO, Scotia Bank                                                     2350

Jefferies                                                                      2335

BOA, Goldman, Stifel, Credit Suisse, UBS             2300

Everyone forecasts that the Fed will continue to raise short term interest rates.  On average the forecast is for the Fed to raises its funds rate three times in 2017 as the economy continues to strengthen.

US Dollar

This one is easy.  Go ahead and book a trip to anywhere in Europe as the current strong dollar is expected to stay in place all year.  With the US economy starting the year well positioned for more growth, and a Fed that is expected to be raise interest rates, a strong dollar is a universal prediction.

Volatility/Uncertainty

Investors hate volatility and uncertainty, but traders love it.  The general belief is that the new President, who supports a massive, but unknown, agenda of fiscal measures and potential tax changes, will create more uncertainty.  Market volatility should be higher given the uncertain outlook.

US Housing

Single family housing demand and prices have turned positive and are forecast to be strong in 2017.  Millennials, who have been consistent renters, are expected to begin to buy.  Surveys suggest their appetite will be for smaller spaces in more urban locations.

Summary

2016 may go down as the year when pigs flew or when hell froze over.  After seeing interest rates in certain markets go to negative levels for the first time, it is not surprising that investors enter 2017 a bit on edge.  For the past several years there has been much talk of a “New Normal” of slow growth.  Stocks had become increasingly seen as a source of income.  In mid-2016 the dividends of 65% of the stocks in the S&P 500 provided more income in dividend yield than investors could get on the 10-year US treasury bond.

But, 2017 starts with an apparent expectation that we could be returning to the “Old Normal”. This is an environment of stronger growth and higher interest rates.  By the end of 2016, the bond market had begun to retreat, and only 30% of the stocks in the S&P 500 yielded more than the 10-year government.  So has the New Normal become old already?

Carl Gambrell