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The stock market is among the few things that are more unpredictable than the weather. The market can be a mystery to those trying to pickapple-converted-space”> stocks, make market predictions or see trends.
Still, that doesn’t stop people from making bold stock market predictions, as history has shown. Here are 10 forecasts that might surprise you.
1. Interest rates will tread water and keep bond yields in check.
The Federal Reserve likely will raise interest rates twice over the next year, said Sameer Samana, a Wells Fargo Investment Institute global quantitative strategist. Samana predicted that if the Fed raises rates in December, it will hike them just one time in 2017. If the Fed doesn’t raise them in December, it will do so twice next year.
“We believe the Fed will raise at a very gradual pace due to the uneven nature of economic growth,” he said. The Fed acknowledged this recently when it downgraded the outlook for long-term economic growth. The Fed wants to raise rates and normalize its policy. However, it needs to balance that desire against the risk of hiking too soon and triggering another recession.
Thus, Samana forecasted two quarter-point hikes, which will “keep a lid on how high bond yields can go,” he said.
2. A Trump or Clinton presidency will not sink the economy.
Pundits like to pontificate about how disastrous the next president will be for the economy if America elects the wrong person. But don’t worry if your favorite candidate loses, at least in terms of the impact on the market, said Samana.
“We don’t believe the outcome of the presidential race will meaningfully alter the trajectory of the U.S. or global economy, because although growth might not be as strong as hoped, it is now self-sustaining,” he said.
Samana also said there is a likelihood of a continued divided government. Such division means that any major proposals offered by the candidates will not become law without compromise.
3. Emerging markets will experience volatility.
Investing in emerging markets can be stressful in the best of times. But 2017 might be strictly for those with strong constitutions because volatility will be the name of the game, said Joshua Wilson, Texas-based partner and chief investment officer at WorthPointe, a fee-only financial planning firm.
Much of the fluctuation will be a result of China’s monetary policies, he said. “China’s credit expansion is mind-boggling,” said Wilson.
For example, in the first quarter of this year, the ratio of credit to GDP in China expanded by 6 percent, he said. “Unfortunately, stimulus encourages speculation,” said Wilson. “Debt in emerging market private companies — with the exception of financials — increased from 95 percent to 140 percent of GDP from 2010 to 2016.”
Wilson added that China seems committed to devaluing its currency to prop up this “Ponzi scheme,” and that any number of things could result in an ascending dollar, which would spell disaster for emerging markets. So, hold on tight.
4. A decline in stocks might offer a buying opportunity.
A new U.S. president will propose new policies, which could introduce uncertainty, said Samana. In turn, this could lead to a decline of 5 to 10 percent in U.S. equities.
“If a 5 to 10 percent price pullback were to materialize, we believe it would represent an opportunity to invest in U.S. large-capitalization stocks, especially cyclical sectors such as consumer discretionary, industrials, technology and healthcare,” said Samana.
5. Homebuilding stock prices will suffer.
Housing has recovered — for the most part — so how can homebuilding stocks decline? Although existing home sales and new home sales and starts will continue to increase, it will be at a slower pace in 2017, said Brad Hunter, chief economist with HomeAdvisor.com.
“The implication for homebuilding company stocks is negative,” he said. Hunter said he expected a slower rate of increase in revenues at the same time that lot and labor costs continue to rise.
Once mortgage rates start to rise, there will be a brief uptick in home sales as fence-sitters make their move, he said. But then there will be another decline. The degree to which mortgage rates rise will determine the severity of the fallout in housing, he said.
Regardless, Hunter said, homebuilder margins are going to suffer — and so will homebuilder stocks. “From my reading of the analysts’ recent reports, it may well be that they have not accounted completely for this margin effect,” Hunter said.
6. The return of modest inflation will keep markets healthy.
After years of inflation that was too low for good economic health, Samana expects inflation to creep up a bit in 2017, which spells good things for the markets. He predicts 2.1 percent inflation in the U.S. in 2017, up from 1.4 percent this year. He also expects inflation to pick up in the rest of the world.
Low inflation levels in recent years have increased concerns of deflation taking hold. Deflation can lead to declining asset prices and reduced consumption, Samana said. “The higher, more normal (inflation) numbers that we expect for 2017 makes some of these downside risks to global economic growth less probable,” he said.
He added that the central bank is well-armed with tools to keep inflation in check should such intervention be required.
7. The U.S. will grow faster next year.
Samana predicts the U.S. economy will grow by 2.1 percent in 2017. That’s a bit higher than his 2016 forecast of 1.9 percent, which is good news for both the economy and the market.
Samana admits the relatively modest uptick in growth won’t satisfy those who would prefer the economy to grow much faster. He also believes the commodities market will remain in a secular bear situation, with prices failing to move meaningfully higher or lower.
But, he said, the U.S. will stay out of a recession. “Given the positive trends in unemployment and housing, the U.S. consumer will remain resilient and the U.S. will keep growing,” he said. He even expects unemployment to drop lower — to 4.5 percent by the end of 2017.
8. Artificial intelligence will continue to lead trading trends.
Artificial intelligence is used more often in trading because it is based on mathematical algorithms that optimize timing, price, quantity and risk, said Michael S. Young, CEO of Mediatrix Capital.
“Algorithms are able to make extremely complex decisions with no emotional component whatsoever, and rely only on mathematical facts,” Young said. In short, AI helps traders take advantage of opportunities they would have missed.
Finding yield is harder than ever in today’s dynamic business climate. Fund managers who use AI are able to generate profits at a speed and frequency impossible for a human trader. So, expect the role of AI to grow in 2017, Young said.
9. Energy stocks will continue to drain.
Falling gas prices are a good thing for consumers at the pump, but a bad thing for investors in energy stocks. It is unlikely that 2017 will be any better for the energy industry than 2016, said Emmanuelle Johaadien, COO of ForeignExchange.com, an international payments and currency exchange company.
Energy companies are in a self-defeating price war, he said. “In most countries, utility companies compete in auctions for long-term commercial contracts to sell their energy,” he said. “In order to lower the cost for end consumers, bids are awarded to whomever can produce the energy at the lowest possible price.” So, in 2017, energy stocks will lose value as energy becomes less expensive, he said.
10. 2017 might be a good year to short the market.
Volatility will be a big feature in U.S. markets as well as emerging markets, said Mike Chadwick, CEO of Chadwick Financial Advisors in Unionville, Conn. “We’re at a point in time now with volatility at all-time lows,” he said. However, he noted that several factors could lead to more volatility, including:
- A historic U.S. presidential election
- Global markets at or near all-time highs
- Weak economic conditions
- Record government debt all around the world
So, it’s likely just a matter of time before volatility returns, Chadwick said. “For those willing to be patient and await the arrival of it, there is a nice opportunity there,” he said. He predicted assets will decline as volatility rises, offering up an opportunity to short the market before volatility rises.
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