A Year Full of Surprises

I would like to thank all of my clients for the trust that they have placed in me this year to manage their investments.  Before I review 2016, and make my market predictions for 2017, I wanted to wish you and your family a Happy Holiday. This will be my last post of the year. I promise that next year I will continue to probe for potential market risks, as well as seek out new investments that can help you meet your goals. It would be very satisfying to repeat the 2016 return next year!

2016 will go down as a year full of surprises. Merriam-Webster best encapsulates 2016 with their Word of the Year, ‘Surreal’.  Here are a few of this years biggest surprises:

  • The U.S. stock market had the worst start ever to begin the year, only to finish with one of the biggest rallies.
  • Oil fell to as low as $26 a barrel only to rebound 100% to $52 a barrel.
  • The gold bulls drove up prices 25% in the first part of the year, and then prices collapsed 17% in the second half of the year.
  • The political surprises began on June 23rd when Britain voted to leave the European Union, which was one-upped by American voters, electing an anti-establishment president.
  • On July 8th, the 10-year Treasury fell to an all-time low of 1.38%, and has now nearly doubled to 2.60%.
  • And don’t forget the Cubs won the World Series!

I’ll leave my market predictions for 2017 to the prognosticators who make a living out of predicting the future. Nobody could have predicted all of the “surreal” events that occurred in 2016. Larry Fink, who has been named one of the “World’s Best CEO’s” by Barron’s for nine consecutive years, said on CNBC yesterday that retirees should own more equities and less bonds. About one year ago, he was predicting a further 10% drop in equities after stocks had already fallen 10%. I’m positive that he would not have given that same advice last year! Mohamed El-Erian, who some consider the world’s best economist, is warning investors to raise more cash. His interview on Bloomberg TV the other day was very ominous. The only problem is that he has been giving the same warnings all year that investors should hold more cash. I expect him to double down on his warnings to hold cash. I would bet the house that at some point he will get it very right. Timing the correction is the difficult part. If these two market experts can’t make accurate predictions, then their guesses are as good as mine.

While I avoid making market predictions, I monitor for potential market risks. Here are five warning signs that the market is fully valued heading into 2017:

  1. There are more positive leading indicators flashing green than I can remember. Gallup’s U.S. Economic Confidence Index is at another new high in its nine-year trend. You will find many more buying opportunities when confidence is near lows and not at all-time highs.
  2. TrimTabs, which reports market inflows and outflows, showed that the market inflows since Election Day is equal to 1.5X of all the inflows in 2015. The CEO was quoted as saying, “One has to wonder who’s left to buy.”
  3. Rising stock prices have become unhinged from corporate earnings, which haven’t risen as fast. Those that buy stocks with high P/E ratios are betting that future earnings will eventually catch-up to current prices.
  4. TimTabs has noted that buybacks have tumbled to the lowest level in 5 years and insider buying is at the lowest level since 2011.
  5. The Chinese economy is under pressure from a large debt burden. President elect-Trump’s campaign promise to bring jobs back to the U.S. is very negative for China.  He has proven to be a very effective campaigner and has no problem tarnishing his opponents to gain the advantage. He is a master deal-maker and his cabinet/advisors are also full of successful deal-makers. The early signs are that he is not going to play nice with China.

Optimism around Trump’s agenda is the major reason why the stock market has surged and keeps hitting record high after record high. U.S. business leaders are getting behind him 100% to bring manufacturing jobs back to the U.S.. Profits will rise if Trump can accomplish his aggressive agenda. However, the risks that I noted above are warning signs that markets will remain volatile.

I wish you and your family a healthy and prosperous 2017!

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