Predictions for 2018: Part I

The original Lone Wolf of Wall Street wasn’t the pump-and-dump artist made popular by Leonardo DiCaprio in the painful-because-it’s-true movie The Wolf of Wall Street. The Lone Wolf of Wall Street moniker was put on a trader named Bernard Baruch somewhere around 1903.

Baruch made a fortune speculating on sugar before he turned 30. As a superstar trader, he could have been a head honcho at any Wall Street firm, but he went his own way and opened his own brokerage firm, hence the nickname Lone Wolf. 

In 1916, Baruch left Wall Street to advise President Woodrow Wilson. He headed the War Industries Board that directed U.S. economic mobilization for WWI. He continued as an advisor to Roosevelt and Truman. 

Baruch is probably best known for his quotes, some of which I’m sure you know but didn’t know were from Bernard Baruch, like: 

“If all you have is a hammer, everything looks like a nail.”

“Nobody ever lost money taking a profit.”

“Millions saw the apple fall, but Newton was the one who asked why.”

Then there’s my favorite: “The main purpose of the stock market is to make fools of as many men as possible.”

Isn’t that the truth?

You sure don’t ever have to look very far to find examples of the foolish. Remember JP Morgan CEO Jamie Dimon saying Bitcoin was a fraud and that anyone who bought it is stupid? Yeah, that. Bitcoin was just over $4,000 at the time…

How about those predictions that Trump would tank the stock market and the U.S. economy? 

Then there are analysts predicting what stocks will do, like Twitter falling to $10. One analyst has a $30 target on GE right now…

Yeah, sometimes it really is better to just keep your mouth shut lest you open it and remove all doubt.

But then that would leave me and the other editors at Wealth Daily in a bad spot. It is our job to tell you what’s going to happen. With the stock market, with individual companies and technologies, with commodities, with the economy…

Every single day, we risk becoming fools in front of hundreds of thousands of investors. If that doesn’t hone your edge, I don’t know what will. And on Monday, December 18, I will once again put my credibility on the line with my predictions for 2018. But first, let’s have a look back at my 2017 predictions and see whether I am fool.

2017 Predictions Review

1. The S&P 500 will hit 2,425 (but don’t expect it to finish the year there). Might as well get the toughest one over with first. I’m seeing S&P 500 earnings estimates between $124 a share and $130. Right now, 2016 earnings are expected to come in around $108 a share. So analysts are expecting a pretty big jump for earnings in 2017.

Why? Well, oil stocks will help. They’ve been a drag on earnings for two years. Now, with oil prices up, they can contribute on the positive side. And then there’s Trump…

Analysts are already pricing in a corporate tax cut to 18–20%. And with Republican control of the government, this will likely happen. 

At $130 a share, the 2,425 level commands a P/E just shy of 19. I think this is doable.

Expectations are already running high. That can certainly carry over to the early stages of policy actually being enacted. As in there will be enthusiasm if Trump goes after taxes first — stocks will rally more. But will overall policy be enough to sustain stock prices all year? This is where I have doubts. 

Earnings estimates for the year ahead are always about 10% too high. Even if we get a boost to earnings from tax cuts, the S&P 500 will likely not hit $130 in per-share earnings in 2017. And if Trump really gets aggressive on the trade front, earnings could be impacted.

What if China retaliates against U.S. companies? GM is in the news today, as China has opened a probe. China can easily dent earnings for companies like Apple, Ford, and Starbucks.

So, I think we see a rally in the early going of 2017, with market highs coming in April/May. Then we get volatility in the second half and finish 2017 below the 52-week high. 

Correct. Coming into 2017, my target was pretty much the most bullish out there. Many analysts simply couldn’t see the bull market extending for the ninth consecutive year. So I feel great that I kept my paid subscribers buying stocks for more upside this year, even though the S&P 500 beat my target. 

Now, here’s the thing about predictions: The more specific you are, the greater chance you will be wrong. That’s why palm readers and fortune cookies keep it vague. Not me. So the timing aspect of my forecast was off. The S&P 500 hit my target in early June, not April/May. I missed by a few days. And if anything, the market got less volatile in the second half. But so what? This is a win for me.

2. Oil trades between $50 and $75. I think this one can be answered with a simple observation: Saudi Arabia wants to sell part of its oil company, Aramco, in an IPO. Will it make more with oil at $50? Or at $70? Exactly. 

Correct. Oil dipped below $50 in May and rallied back above $50 in September. It currently sits just below $60. Yep, got this one, too. 

3. Gold rallies back to $1,300 in the second half. I know, I know, gold is very oversold right now. But with enthusiasm for stocks in the early going, I don’t see a strong rally coming for the barbarous relic. Sure, a dead-cat bounce is likely soon — use it to lighten up. Don’t expect a sustained move higher until late summer/autumn.

Correct. Gold peeked over $1,300 in April and June, but sold off. The solid run over $1,300 didn’t start until July 10, and it ran until mid-September. That’s a win, baby.

4. Just two rate hikes, both in the first half. I believe Yellen wants rates higher. And she finally has a window of opportunity. Look for two more quarter-point hikes in the first half of 2017. But then the economic data starts to weaken, and Yellen has to stand down and go back to the “data-dependent” stance the Fed has had for the last year. 

Wrong. So, the Fed is expected to give us the third rate hike this afternoon. It hasn’t happened yet so I could just ignore it. But that’s not sporting. Consensus is virtually unanimous. After a strong start, I don’t mind putting this one in the “loss” column

5. Emerging markets plunge in second half. Are you getting the feeling that I’m not excited about the second half of 2017? Look for emerging markets to do OK in the first half of the year, as better oil price and general good vibes help. But higher interest rates and weak EU growth weigh in the second half. Emerging markets still hold trillions in dollar-denominated debt and loans. These get more expensive as U.S. rates rise. Some real fear about markets in the second half brings volatility and a rally for gold.

Wrong. Good lord. Emerging economies have been anything but weak. In fact, you could argue that strength in emerging economies is underpinning U.S. growth and helped the U.S. markets to a fantastic second-half run. I got this one exactly backwards.

6. Yuge tech rally. Yeah, so, I’m going Trump again. Tech companies have a stupid amount of cash overseas. And investors will push the stocks of Apple, Microsoft, Cisco, and other large-cap techs up on the prospect that $1 trillion of cash stashed overseas will be brought home. Cisco might even pay out a special dividend to cover up its lack of growth. I also think we will see a slowdown in usage numbers for Facebook, which will hit the stock hard. 

Correct. Tech stocks were the big winners this year, followed by financials. Despite my specific call on Facebook, this is another win. 

7. Utilities and REITs lag (but with one major exception). These two sectors were market leaders for the last couple of years. And I have been very vocal that distributed power is hurting the utilities. Rising rates will also hurt. The select REITs that I’ve recommended to my Wealth Advisory readers have been amazing. And we will hold most of them, because we have terrific gains, and the dividends are also terrific. But for the most part, I don’t think they do so well in 2017. Except for one segment of the REIT sector, where I think higher stock prices are a lock. Care to guess what it is? 

Correct. OK, I gotta work this one a little. There are three aspects of this prediction: utilities lag, REITs lag, and one sector of REITs outperforms. So, yes, REITs lagged. The REIT ETF (RWR) was basically flat on the year. And the one REIT sector I said would outperform (it was data centers) did just that. The Wealth Advisory data center stock was up 45% this year, putting our total gains at 271%.

Then there’s utilities. They did OK — the utilities ETF (XLU) rallied 14%. But the S&P 500 is up 17%, and the Nasdaq ran a crazy 26%. So, yeah, that’s technically lagging. To quote Cal Naughton, Jr., from Talladega Nights: “I might have won this race on a technicality, but if you try to take this trophy from me I’ll sock you square in the face.” 

8. Once again, GDP can’t beat 3.5%. As I told you on Monday, predicting U.S. GDP growth under 3.5% is a slam-dunk. So yeah, I’m padding my prediction stats with this one. And no, I don’t feel at all guilty about it. 

Wrong (Maybe). Ya know, this is just what I deserve. I tried to throw a bunny in there to pad my stats, and it sure looks like GDP growth is beating 3.5% this quarter. Stupid emerging economies. But in light of the “technicality win” with utilities and REITs, I’m just gonna take the loss on this one. 

Well, there you have it. In baseball, three hits out of 10 at-bats gets into Cooperstown. I don’t how you get into the Prognosticators’ Hall of Fame. I don’t even know where it is. But five out of eight is damn good. Sure wish I had something about Bitcoin in there. Maybe I’ll put that in my 2018 forecasts. You’ll find out on Monday…

You can view Part II of my predictions right here. 

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.