A year ago we asked 16 industry experts and MODERN TRADER analysts to provide their forecast for various market sectors in 2017. More than half had a positive outlook on the S&P 500, but only Dan Gramza predicted that the S&P would gain more than 15%. Alan Bush, Joe Cornell, Carl Larry and Tim Melvin all predicted the broad market would gain more than 10% in 2017.
Our panel did a much better job predicting where crude would end up, as 33% of our respondents selected the $55 to $60 per barrel window for WTI crude oil, which settled at $57.16 as of Dec. 18; and 60% expected crude to settle between $50 and $65.
Our team didn’t do as well looking at gold as more than half expected gold to lose value in 2017. Only four: Bush, Patrick Byrne, Matt Weller and Jacob Weinig forecast gold to rise above $1,200 for the year. Gold is currently sitting at $1,265 per ounce.
Bitcoin is another matter altogether. Last year’s panel was asked to forecast 2017’s closing bitcoin price when the crypto was trading near $960. Jonathan Hoenig wins this category by default as the only analyst to predict bitcoin to close 2017 above $1,300.
Five of our panelists predicted that President Donald Trump’s approval rating would be south of the Mendoza line by the end of the year. This is impressive as, typically a first-year president has a bit of a honeymoon period. More impressive is that four experts: Byrne, Hoenig, Ken Schreffler and Weinig predicted that Trump’s approval rating would be below 40%. Currently, the Gallup Presidential Approval rating is sitting at 34% and has been steadily dropping throughout the year despite strong economic numbers.
It is hard to measure the more discretionary predictions because equity markets performed well across the board. Many negative geopolitical situations mentioned were exacerbated, yet the market ignored them and moved higher. However, our panel correctly focused on sectors expected to be impacted by the recent election. Several panelists highlighted how the financial sector would benefit from expected tax cuts, rate increases and rollbacks in regulation as well as the healthcare sector expected to benefit from a potential repeal of the Affordable Care Act.
Some cited specific examples that proved prescient. Joe Cornell recommended Aptevo Therapeutics (APVO), which more than doubled. Gramza highlighted the banking sector specifically calling out Citibank (C) and JPMorgan (JPM) , which both outperformed the broad market. Gramza also noted that the technology sector would be strong, allowing the Nasdaq 100 to lead all stock indexes, which it did, rising more than 25% versus the S&P 500s roughly 19% gain (as of press time).
What will be the biggest fundamental factors affecting the markets in 2018?
Azous: The biggest question for 2018 is whether the U.S. labor market gets tight enough to produce genuine and widespread wage inflation. That along with higher crude oil prices has the potential to harm fixed income.
Cuban: Global political instability and the results of the Mueller investigation if it looks like Trump could fall.
Gramza: There are a number of fundamentals that could have an impact on the stock market. It is important to have strong stock market earnings and high consumer confidence that leads to strong consumer spending, which represents 70% of the U.S. GDP. These factors, along with a moderate Federal Reserve policy, can continue to fuel the stock market. However, there are geopolitical tensions that can create uncertainty in the U.S. stock market such as the Middle East, Russia, North Korea, Brexit and China.
Hoenig: A dramatic spike in long-term interest rates.
Larry: Economic regulation reform. I don’t think that everything will be overturned; you can toss off half the blanket and still feel cozy.
Melvin: Interest rates, earnings and tax reform.
Moas: Consumer confidence, the economic cycle and high valuation.
Netto: Inflation globally and in the United States. The effect of U.S. tax policy and continued gradual rate increases from the Fed and global central banks.
Putnam: U.S. tax legislation (if passed) and the projected rise in the national debt, the Administration’s decision on whether to pull out of NAFTA or not and global growth, especially in Europe and Japan.
Sosnoff: Over-owned stocks. Too much money passively invested. And a yield curve that is way too flat.
Unanimous AI: The swarm considered the relative impact of six factors that could impact markets in 2018: Technical corrections, the value of the dollar, foreign economies, U.S. interest rates, U.S. tax structure, and political instability. Through an iterative evaluation process in which the swarm sequentially identified the factor expected to be least impactful, the swarm ultimately decided that political stability/instability would have the greatest effect on U.S. markets in 2018. Also highly reflective of our current news environment, the swarm highlighted the strong influence the emerging U.S. tax structure will have.
Weinig: Inflation being kept in check.
Weller: The accelerating withdrawal of monetary stimulus will be a big theme in 2018. Major central banks, including the Federal Reserve, European Central Bank and Bank of England, will likely raise interest rates and/or wind down asset purchase programs. With less monetary stimulus to support asset markets, either fiscal stimulus or the enigmatic “animal spirits” will have to pick up some of the slack.
Which equity sector(s) will perform well in 2018? Why?
Azous: Energy will be the best performing sector on account of the repair process continuing in crude oil and investors forced to add inflation-beta to a traditional 60/40 investment portfolio to protect against the erosion of one’s purchasing power.
Cuban: Tech: Amazon (AMZN) is eating the world.
Gramza: The healthcare and technology sectors could have a strong showing in 2018 due to changing demographics’ demands for healthcare, and technological advances in both sectors.
Larry: Technology, transportation and energy; bringing the best of the economy together.
Melvin: Community banks. Consolidation continues.
Moas: Industrials and materials.
Netto: Tech and energy. Tech will receive more money flows that come into the market and benefit from buybacks. Oil companies will benefit from crude priced between $60 and $70 for most of 2018.
Putnam: Sector shifts in 2018 depend on the last-minute deals that might be embedded in the U.S. tax cut that may or may not happen. Still, most scenarios seem to favor financials; energy looks fine with oil in a wide trading range, while mega-tech looks over-extended on an earnings vs. risk analysis. If (big if) the corporate tax cut actually passes, then the small-cap Russell 2000 potentially could outperform the tech-heavy Nasdaq 100.
Sosnoff: Commodity-based ETFs.
Unanimous AI: To project performance, the swarm was tasked with distributing a $100 investment across six sectors. Technology ($36.52) and telecoms ($23.76) received more than 60% of the investment, far outpacing expectations for returns from financials, materials, energy and healthcare.
Weinig: Financials. More of the same; relaxation of regulation, higher interest rates and lower taxes.
Weller: The telecommunications sector should see strong performance on a purely mechanical basis. The Global Industry Classification Standard will be updated in September, with the telecommunications sector broadening out to “communication services.” The upshot is that the normally stodgy, defensive sector will see an injection of higher-beta technology and consumer discretionary stocks, potentially including market-leading companies like Facebook (FB) and Alphabet (GOOGL) for the fourth quarter.
Which individual stocks or commodities do you expect to outperform the S&P 500 in 2018? Why?
Azous: Master Limited Partnership exchange-traded funds (ETF), exchange-traded notes (ETN) or closed-end funds will be the best performing sector on account of crude oil trading above $70 sometime in 2018.
Gramza: Healthcare Sector Stocks: Align Technology, Inc. (ALGN), AbbVie Inc. (ABBV), Anthem Inc. (ANTM), Centene Corp. (CNC), CIGNA Corporation (CI). Technology Sector Stocks: ANSYS Inc. (ANSS), Apple (AAPL), Broadcom Ltd. (AVGO) and Cognizant Technology Solutions Corp (CTSH). These stocks were selected based on their growth and strength within their sector.
Hoenig: Rhodium, up nearly 100% in 2017, will double again as production in South Africa stalls and Russia halts exports as a means of economic retaliation against U.S. sanctions.
Larry: Refinery stocks are going to get more love. Too many folks have just taken margins for granted. Stable crude oil prices and increasing demand makes them the rulers of their domain.
Melvin: New Senior Investment Group (SNR), Colony Capital Inc. (CLNY) and StoneCastle Financial Corp (Banx) because they are cheap.
Sosnoff: Gold, silver, wheat, corn, soybeans, natural gas and copper on the commodities side. [For equities] IBM, Snap Inc. (SNAP) and the iPath S&P 500 VIX Short-Term Futures ETN (VXX), which tracks the performance futures on the Cboe Volatility Index (VIX). I expect the commodity sector to be strong and volatility to normalize. I like IBM and SNAP only because they haven’t participated this year.
Netto: FANG stocks (Facebook, Amazon, Netflix, and Google) to outperform. We are in the process of a tech melt up and favorable tax policy is only going to fuel that. Record amounts of money is migrating from active to passive strategies and the larger-cap tech stocks should continue to benefit from this.
Moas: DineEquity Inc. (DIN), Macy’s Inc. (M), Bluebird Bio Inc. (BLUE), Mazor Robotics Ltd. (MZOR) and bitcoin.
Weller: It may be difficult for any assets to outperform the S&P 500 if we enter a “melt-up” phase to conclude the bull market, but gold is likely to have a strong year. The yellow metal was bitcoin’s forgotten cousin in 2017, but it did manage to break back above its 200-day moving average. Like many assets, gold has historically delivered better returns at lower volatility when it’s been above this key trend indicator. Of course, if the S&P 500 does enter a melt-up phase, it’s likely to be the market’s “generals” (namely, the FANG stocks) that lead it higher. While they’ve all had an impressive performance in 2017, they haven’t reached the levels that market leaders typically achieve at the peak of market cycles.
Unanimous AI: The swarm specifically called out Amazon, Google, and bitcoin as likely to outperform the S&P 500 in 2018. Amazon, in particular, is projected to be the strongest performer, garnering $54 of a potential $100 investment (Google received $29 and bitcoin $17). Bitcoin is considered the most volatile, with the sense that it could continue its astronomical growth as it becomes better understood and more broadly adopted; with equal dread that a “bitcoin bubble” could burst in the coming year.