Some predictions for year 2017 are:
- 2017 may be the least certain in years, with higher-than-usual risks and a binary set of outcomes that have dramatically contrasting results: euphoria or fizzle, significantly higher or lower than the base case. As the likelihood of pro-growth policies waxes and wanes in the coming months, we see potential for big market swings. Risk/reward will be more important than absolute targets. 2017 could be a binary year where the market falls to 1600 in the bear case and 2700 in the bull case.
- The key positive for 2017, in our judgment, is that investors are overweight deflation hedges (i.e. bonds) relative to inflation hedges (equities) at a time when policy makers are moving away from NIRP towards fiscal stimulus, and inflation expectations are set to continue rising. However, we see a down market in H2 2017, hence our year-end 2017 target of 2,300. The second half challenges include the potential negative impact of US bond yields above 3% (3% being the CS view for end-2017); the growing pricing power of US labor squeezing profit margins; and the risk of China refocusing on reform rather than pro-growth policies. We continue to prefer equities to both bonds and gold.
- No recession is in sight, for now. However, the old saying 'Three Steps and a Stumble' could put stocks to the test when the Fed hikes again after a hike this December.
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