Annual predictions time! People are feeling a bit wealthier after this long stretch of bull market, I imagine, though the Fear and Greed Index is highly volatile and and has swung back and forth between extremes at least a couple times a year over the past few years, with 2017 being no exception, and that has made no real impact on the market.
Something is driving this market higher other than simple investor sentiment, I think, so in the big picture it appears to me that we’re seeing fiscal stimulus (tax cuts, mostly) take the handoff from monetary stimulus (low interest rates and quantitative easing) in the US, and this year will be the story of how that plays out.
So it’s time for predictions, right? I’ll offer mine, with the caveat that they’re almost certainly going to be wrong. I’m not much of a forecaster, I’m afraid, I’m a guesser — which probably means I’m right about as often as the forecasters, but I don’t get to take credit because I’m basing my guesses on sentiment and experience, not complicated models and math.
Still, I think it’s useful to write out what I’m expecting, because that’s probably going to color how I see individual stocks as I make my buy and sell decisions throughout the year… and it will give you some idea of the reasoning that biases my opinions.
I think medium-term interest rates will spike considerably higher this year, as inflation ticks upward and the market surges for the first half of the year following lots of estimate upgrades in the wake of the tax cuts. Once analysts get those new corporate tax rates into their models and companies begin to “beat and raise” after a strong fourth quarter, the earnings numbers will look far more exciting, and the updated estimates will bring lots of upgrades and lots of investor enthusiasm as they see estimate increases. It will also bring a huge selling season for real estate this Spring, because rising rates mean people rush to get their buying done… though that will be colored by the new tax rules, particularly in high-cost and high-property-tax coastal real estate markets, and I suspect this may be the last great Spring for housing stocks (I rarely get the timing on that market right, though, and I don’t own any housing stocks… unless you count Berkshire ...