What I Wrote About Markets Dec. 2017
Market Top or Continuation?
Equity markets are transitioning from an interest rate driven bull market to a earnings driven bull market. Interest rates have bottomed and inflationary pressure is coming back. The current economic surge should continue with GDP moving to a 3% level going forward. The new administration should also lean towards more deregulation. To add to the fuel, the new President is wanting to cut corporate tax rates to 15%. Thomson Reuters has hypothesized that every 1% decline in the corporate tax rate will add $1.31 to earnings to the S&P 500. I doubt that he can reduce them that far, but a move to a 25% tax rate will put the U.S. on equal footing with a majority of the large economies. That would add approximately $14 to the S&P 500 forward looking earnings. If you use a P/E of 17 (historical number) then next year we should see the S&P 500 exceed 2450.
The market has been consolidating the last two years and recently broke out to new highs fueled by the "Trump Trade". This action in the market is not typical of a top. But, instead, I believe, a continuation of the secular bull market (which I have been writing about for the past year). It is the start of a new leg up and should run for another 3 - 4 years. Obviously, there will be pull backs. But these pull backs are not to be afraid of, but buying opportunities for a rising market. And, as such, I won't be fighting the tape. My bias will remain to the long side. Financials will lead the way, anything interest sensitive will lag. Also, with inflationary pressures coming back to the market, commodities will make for a great trade as most are at historically low levels (inflation adjusted).
The best news for traders, which I saved for the last, is that small caps will be favored over large cap names. Expect a strong market for traders with lots of volatility. Biotechs should come back as well and prove to be a strong sector in 2017.
Happy New Year to everyone and good trading in 2017!
