Having gotten virtually none of his "surprise" forecasts for 2016 right - among which that the S&P will decline (after it was supposed to rise by 15% in 2015 when it closed red for the year), the 10Y will not rise above 2.50%, Hillary Clinton will defeat Ted Cruz in the presidential election, Democrats will gain control of the Senate, Chinese growth drops below 5% as the country's banks "get in trouble", crude oil remains in the $30s, and global growth falls to 2% (he did correctly predict just one rate hike, and the continuation of the European refugee crisis), today Blackstone's Byron Wien issued his list of Ten Surprises for the coming year for the 32nd time.
Considering that Wien has been doing this since 1986, one would think he has gotten better at it, but alas no.
So after last year's embarrassment, not surprisingly the 83 year old has flip-flopped back to optimistic, and in his latest set of forecasts for 2017 expects the S&P 500 to rally to 2,500 as corporate profits jump to $130 a share. Which is ironic because the "vice president of multi-asset investing at Blackstone Group" failed to see the 10% rally in U.S. shares last year, instead expecting a down year.
For 2017, he anticipates that yields on 10-year Treasury notes will approach 4% as gross domestic product expands at a rate of 3%. He also expects German Chancellor Angela Merkel to lose her bid for re-election. The upbeat forecasts set Wien apart on a day when other legacy voices from a past generation voiced caution, among them Larry Summers who said investors are overlooking the risks of Donald Trump’s policies, while analysts at Eurasia Group said Trump could contribute to a level of global instability not seen since World War II.
Perhaps, but what we do know almost for certain is that assumping the opposite of Wien's forecasts has a hit ratio well above 50%. Which means: S&P crashes, 10Y yields tumble, the US economy enters a recession, but at least Merkel will keep her job.
According to Byron, a “surprise” as an event that the average investor would only assign a one out of three chance of taking place but which Byron believes is “probable,” having a better than 50% likelihood of happening. We call it something you read one year from today and laugh.
Below is the list of Byron’s Ten Surprises for 2017:
- Still brooding about his loss of the popular vote, Donald Trump vows to win over those who oppose him by 2020. He moves away from his more extreme positions on virtually all issues to the dismay of some right wing loyalists. He insists, “The voters elected me, not some ideology.” His unilateral actions throw policy staffers throughout the government into turmoil. Virtually all of the treaties and agreements he vowed to tear up on his first day in office are modified, not trashed. His wastebasket remains empty.
- The combination of tax cuts on corporations and individuals, more constructive trade agreements, dismantling regulation of financial and energy companies, and infrastructure tax incentives pushes the 2017 real growth rate above 3% for the U.S. economy. Productivity improves for the first time since 2014.
- The Standard & Poor’s 500 operating earnings are $130 in 2017 and the index rises to 2500 as investors become convinced the U.S. economy is back on a long-term growth path. Fears about a ballooning budget deficit are kept in the background. Will dynamic scoring reducing the budget deficit actually kick in?
- Macro investors make a killing on currency fluctuations. The Japanese yen goes to 130 against the dollar, stimulating exports there. As Brexit moves closer, the British pound declines to 1.10 against the dollar, causing a surge in tourism and speculation in real estate. The euro drops below par against the dollar.
- Increased economic growth, inflation moving toward 3%, and renewed demand for capital push interest rates higher across the board. The 10-year U.S. Treasury yield approaches 4%.
- Populism spreads over Europe affecting the elections in France and Germany. Angela Merkel loses the vote in October. Across Europe the electorate questions the usefulness of the European Union and, by the end of the year, plans are actively discussed to close it down, abandon the euro and return to their national currencies.
- Reducing regulations in the energy industry leads to a surge in production in the United States. Iran and Iraq also step up their output. The increased supply keeps the price of West Texas Intermediate below $60 for most of the year in spite of increased world demand.
- Donald Trump realizes he has been all wrong about China. Its currency is overvalued, not undervalued, and depreciates to eight to the dollar. Its economy flourishes on consumer spending on goods produced at home and greater exports. Trump avoids punitive tariffs to prevent a trade war and develops a more cooperative relationship with the world’s second largest economy.
- Benefiting from stronger growth in China and the United States, real growth in Japan exceeds 2% for the first time in decades and its stock market leads other developed countries in appreciation for the year.
- The Middle East cools down. Donald Trump and his Secretary of State Rex Tillerson, working with Vladimir Putin, finally negotiate a lasting ceasefire in Syria. ISIS diminishes significantly as a Middle East threat. Bashar al-Assad remains in power.
As for his 6 "Also rans", Wein notes the following: "Every year there are always a few Surprises that do not make the Ten either because I do not think they are as relevant as those on the basic list or I am not comfortable with the idea that they are “probable.”
- Having grown weary of Washington after a year in the presidency, Donald Trump moves the White House to New York from April to December and to Palm Beach from January to March. He makes day trips to the Capitol on Air Force One for legislative and diplomatic purposes.
- The Democratic Party is sharply divided on strategy, with Bernie Sanders and Elizabeth Warren arguing for a shift to the left and others wanting to remain in the center. A lack of leadership gives rise to widespread speculation about sharp losses in the 2018 congressional elections.
- Donald Trump’s intimidation tactics prove effective in discouraging companies from moving some U.S. manufacturing abroad, but he fails to bring jobs back. The wage differential is just too great. This becomes his biggest first-year disappointment.
- Trump’s first major international confrontation comes, not unexpectedly, from North Korea. Kim Jong-un threatens to set off a nuclear bomb in the mid-Pacific, calling it “a test.” Trump’s advisors try to restrain his desire to punish the country severely.
- India comes back into the investment limelight. Its economy grows at 7% and corporate profits for established companies are strong. Its stock market leads other large emerging countries, along with China.
- Trump’s efforts to get out of the Iran deal fail. The other countries signing the agreement believe Iran’s weapons-grade nuclear production has been restrained and force the U.S. to remain a participant.
Check back in one year for the laugh.