Two years ago, as part of its one-year forward forecast issue, the ten "experts" polled by Barron's in its one year forward forecast, predicted that the S&P would close 2015 an average of 2210, roughly 7% higher then the final print of 2014, which was at 2,058.9.
Alas, their enthusiasm proved overoptimistic, and the market ended up missing the consensus forecast materially, suffering a down year in 2015, and the S&P 500 closed at 2,043.9. Which is why optimism was somewhat more muted in the Barron's roundtable forecast for 2016, which last December predicted the S&P would close just fractionally above where these same forecasters expected the S&P would end 2015 the year prior, and predicted that the final print of December 31, 2016 would be roughly 2,220.
In retrospect, that particular forecast was far closer to the market, with the S&P500 closing Friday at 2,258, or about less than 2% above the consensus estimate.
So, what do the experts think now?
As is common knowledge by now, less than two months ago, the prevailing consensus was that while a Hillary victory in the presidential election would be bullish for risk assets, a Trump victory would likely result in a correction. And, sure enough, as almost always happens, and as David Rosenberg reminded us earlier today courtesy of Bob Farrell's Rule #9, "When all the experts and forecasts agree, something else is going to happen."
What happened was a dramatic surge in the market because Trump was elected, as his victory unleashe the hope of massive fiscal stimulus, something none of the experts predicted would happen.
Which brings us to the latest garthering of experts.
Over the weekend. Barron's held its latest annual strategist roundtable. The article explaining their outlook starts, appropriately enough, with: "Nobody saw it coming." And it wasn't just the Trump victory. As the following chart from Barron's notes, 2016 was a year of surprises, which however after an initial scare, were mostly to the upside, even as the news kept getting progressively worse:
But it was the outcome of the November 8 election that threw everyone for a spin:
The unexpected election last month of Donald J. Trump as president has been a game changer for the 10 investment strategists whose market outlook Barron’s solicits twice each year. As stocks took off on Nov. 9 and thereafter, fueled by investors’ enthusiasm for Trump’s expected pro-growth agenda, even our group’s bears turned bullish. Wall Street’s seers expect the bull’s romp to continue well into next year, and posit a possible awakening among institutional and individual investors of the animal spirits that were dormant for the past seven years.
In a nutshell, here is where the "experts" stand now:
- all ten strategists surveyed say the market will close higher, with an average S&P forecast of 2,380
- eight out of ten strategists recommend financials
- nine out of ten strategists say avoid consumer staples
Or as the following Salil Mehta chart puts it...
To be sure, the experts have left themselves a loophole: if the hope ends, and if Trump is unable to deliver on the "hope", which they admit is the driver of the rally, "the market will correct."
IF THE REPUBLICANS DON’T make progress with their proposed reforms by mid-2017, say the strategists, the market will correct. For the moment, however, there is hope—and plenty of it. Collectively, the strategists’ mean expectation for the Standard & Poor’s 500 puts the index at 2380 by the end of next year, up about 5% from last week’s 2258. In years past, top forecasters often called for a market gain of up to 10%, but the second-longest bull market ever is getting on in years, and besides, it has rallied furiously in the past five weeks.
Indeed, stocks’ 5.5% gain since the Nov. 8 election might have borrowed a bit from next year’s advance. Year to date, the market is up nearly 11%. Still, all 10 strategists see stocks gaining more ground next year. Compare that with September, when only four of the group were bullish—and some forecasters thought the market would head south for the remainder of this year.
What should one make of this particularly expert consensus expert? As we noted earlier today, David Rosenberg has a rather negative view of this optimistic outlook.
The markets are indeed forward-looking but this latest leg of the risk rally has a certain speculative feel to it. Now, some full disclosure. I actually find it senseless to provide a forecast for the entire year ahead at this time. We are not in normal, more stable time periods. We have been in a heightened state of volatility and that will intensify in 2017 because of the political dynamics in the U.S. as well as in Europe.
We have a president who tweets the first thing that comes to his head, has appointed a cabinet filled with billionaires even though it was rural blue-collar voters that pushed him over the top, and every pro-growth promise was met with an anti-growth measure.
We go into the New Year with investor optimism and equity market valuations running at extremely high levels so initially the risk is that disappointment sets in, but that may not happen until we are well into 2017. I will go on record to say that sentiment and market positioning are so radically negative on Treasuries that it wouldn’t take much to elicit a countertrend bond market rally. We are way oversold here. The economy isn’t that strong and anyone who thinks one man can reverse on his own the structural forces that led to the multi-year disinflation trend — and I’m talking about excessive debt, globalization,
aging demographics and technology — needs to go back to economics school right away.
I think it is very dangerous to be basing investment decisions on expectations of government policy. What is done and when it is done is far too uncertain, and uncertainty is inherently difficult to price. I look back to the Obama “hope and change” enthusiasm — also apparently following a failed presidency. Barrack Obama said he would renegotiate NAFTA, that he would cut income taxes for low and middle income earners, that he would create five million green energy jobs, that he would sharply reduce the power of lobby groups in Washington, that he would embark in an $830 billion, 10-year infrastructure stimulus plan, and that he would not bail out Wall Street.
Well, none of this happened, right?
And yes, the stock market tripled, but that was almost exclusively due to TARP, ZIRP, and QE
* * *
So as I said, it is too early to handicap what Trump will or will not do, especially since nothing “big” can really happen without 60 votes in the Senate (needed to circumvent any filibusters). And yes, I am aware that Mr. Market is not exactly taking my advice, but it’s not the first time and I doubt will be the last.
Back to the coming year. Look for extreme volatility. That will breed recurring trading opportunities on both the long and short side, and across the asset classes. This means holding a higher level of cash than is normal at all times for optionality purposes. Be mindful of how quickly things are getting priced in and be willing to take profits on positions early — more than normal.
Pay more attention to market positioning, sentiment and valuations — moving against the herd mentality will be more important than is usually the case; trades are going to become very crowded as we saw repeatedly in 2016. Which is why 2016 is so instructive in terms of making big bold predictions at the end of a given year, especially the one we are about to head into given the extremely wide range of outcomes.
We started off the year at 2.27% on the 10-year U.S. Treasury note yield; went down to 1.63% in February; up to 1.98% in March; then down to 1.37% in July; and closing the year near 2.5%. We had a cumulative 397 basis points of declines on the rally days and 419 basis points of cumulative increases in yield on the selloff sessions.
Look for even wilder moves this year — a year that could well see a test of technical support at 3% before heading down to close the year at 2%. At the end of 2015, the calls were for 3% yields on the 10-year T-note and then by the summer, there were many calls for 1%. And look at the Fed: the consensus for 2016 was four rate hikes and instead we will see but one (today).
So again, why would anyone plan around some analyst’s year-ahead forecast? What happens when, even if proven right, all those forecasts come to fruition by the end of January?
Well, the answer David is simple: they will again raise their forecast because the price always makes the narrative, not the other way round.
As for Rosenberg, who refreshingly admits he has no idea what will happen, here is his "forecast."
if I have a year-ahead crystal ball (and I don’t), I will lean back on three of Bob Farrell’s 10 Market Rules to Remember:
#2. Excesses in one direction will lead to an opposite excess in the other direction.
#4. Exponentially rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
#9. When all the experts and forecasts agree, something else is going to happen.
So I strongly think we will be seeing a ton of volatility in an even more politically charged year. I think that there is a risk as per #4 that we could well see an early-year meltup in bond yields and equity prices that will then leave us with a #2 situation where the excessive move up in long-dated rates and stock prices reverse course.
How to trade it? "That in turn means to own anything that can benefit if this rampant pro-growth/pro-inflation market psychology doesn’t take hold, which I expect to unfold."
I believe that fading the inflation psychology and identifying equity sectors and areas of the capital market more generally that are not priced for excessive optimism and not currently experiencing a crowded trade, in other words moving against the herd mentality, will likely bear fruit in what is probably going to be an even more intense roller coaster ride than what we witnessed in 2016.
So who wil be right: the consensus, or those who, seeing the writing on the wall, refuse to make a forecast and instead are preparing to fade conventional wisdom? We look forward to the answer, roughly one year from today.
Incidentally, here is a good chart courtesy of Salil Mehta showing how Barron's forecasts have played out over time relative to the actual closing price of the S&P. If there is one forecast one can make with almost definite certainty, is that the S&P will close anywhere but 2,280.
One final point: in an ironic twist, in the same Barron's edition as the roundtable forecast, on the cover page we are greeted with an appropriate warning: "When the experts agree, watch out."
That largely sums it up.