We begin 2017 knowing that this is set to be another fascinating and challenging year for traders and investors.
According to The Economist, The World in 2017 is expected to see a new American presidency, a Chinese Communist Party Congress, elections in France and Germany and the political and economic challenges of Brexit.
This month at the Trading Club we shared the quote of the month from the epic Doland Trump’s Twitter account. He already appears to be taking credit (before even being inaugurated) for the 15 years high in the US consumer confidence and for the US equities being 10% up. The interesting thing to see here will be whether he also accepts responsibility for other sorts of implications that the world might face as the result of his policy and his actions. We will wait to see if there is a recession in his term and if he takes responsibility for that also and even more importantly how he plans to get out of it. At the moment, if you follow the 5-Step-Trading® methodology you will agree with us that the world is currently in the optimism phase as the newly elected President has managed to get some things right and many traders in the market are bullish.
Looking at the US Economy we see a lot of green in the table above with interests rates, real GBP growth rate for 2017 also unlikely to stay red. The real GBP growth expectations for 2017 have not come through yet (we are expecting them from the economists in the next couple of weeks and we will discuss in the next Club meeting and include it in a weekly market report for those of you subscribed to the Trading Club). We see good things for the US Dollar so far.
On the chart of the City Economic Surprise Index we can also see the proof that the economic data is coming out a little bit better than expected in the US with the US Dollar being the currency winner of the month and of the year. But real rates are still negative! What does it mean for traders? If you put your money in the bank and you get 75 pips, but you lose 1.10% in purchasing power so you are still 1% poorer at the end of the year by having your money in the bank. That should force you to invest instead.
If you look at our weekly markets report, you will see that in Norway and Switzerland the economic data is pretty terrible. In addition, we are discussing Australia in further detail in the trading club meeting this month, which will hopefully help you to come up with some good investing ideas going forward.
Financial Markets Outlook 2017
Last month, James Helliwell, Chief Investment Strategist at the Lex van Dam Trading Academy shared with Reuters his market insights for 2017:
“The risk to stocks in 2017 remains skewed to the upside, though more so than in 2016. Although downside risks are also magnified, there will be large double-digit returns to be realized for stock pickers focusing on rate-sensitive sectors and beneficiaries of the reflation theme. Value is expected to again outperform growth as a style, and global infrastructure spending will be the best area to focus as a result of the transition towards fiscal policy beginning with the US under President Trump.
European and Japanese equities should perform well as global equity managers seek value, with the latter supported by a resurgent USDJPY trade. Although political risks will be a persistent concern for the Eurozone, I believe fears are overblown (with the exception of the French election, which is worth close attention) and expect relief rallies in the aftermath of these events to provide buying opportunities and further catalysts for European equities.
Around the world, rates will continue to normalize, with the US 10 year rates on course for 3%. Equity investors should take note for several reasons, though currently, market participants appear to be acknowledging these selectively, through an optimistic lens. The bond to equity yield ratio is narrowing and likely to capture more headlines and airtime next year, and will eventually invalidate the justification for owning stocks at historically stretched valuations. However, over the coming year, I feel there is sufficient room to support the case for equities appreciating further. Coincident with a steepening yield curve, bank stocks should outperform the market and remain a core long position as I first stated the case for in early 2016.
The effect of Trump’s trade policy remains to be seen, and protectionism is seemingly his assumed position. In terms of global trade, the most significant developments going into 2017 are the stabilization of oil prices, rising global business output (JP Morgan Global PMI) and return to inflation in China (PPI) as the world’s second largest exporter. All of these suggest continued reflation and a rising risk of inflation which is now largely priced in by the bond market, so another spike in yields would be surprising even if they should continue in the same upward trajectory.
All said, 2017 is set to be an interesting and challenging year for investors. The greatest risk is perhaps present in passive investing and in benchmarked strategies such as ‘risk parity', which I see threatened by a combination of general valuations (esp. US), rising rates and accompanying volatility.
My best contrarian long idea is in Chinese and other EM equities towards the end of H1, where I do not envisage further dollar strength and believe global growth will follow the lead of DM. I believe gold represents a fantastic hedge between $900 - 1100, should President Trump’s policies fail (or fail to deliver) the economic prosperity that investors are hopeful of, as debt, social and political tensions grow ‘bigly’. Investors should remember that we are in the late stages of an artificially stimulated equity bull market, though I feel that we are more likely in the ‘optimism’ phase with ‘euphoria’ yet to come. This leaves room for the rally to continue and for valuations and prices head higher, despite calls for a bear market. According to my long term projections, the S&P 500 and Dow could rally towards 3077 and 26,900 respectively before the current bull market ends if we are to see a ‘blow off top’ either this year or next.
When the bough breaks, equities will fall… but I’m a buyer of equities in 2017 with a target of 2455 on the S&P 500 (other international benchmarks below):
S&P 500 (USA) 2455
FTSE (UK) 7650
DAX (GERMANY) 13400
CAC (FRANCE) 5000
STOXX 600 370
STOXX 50 3400
FTSE MIB (ITALY) 20650
IBEX (SPAIN) 10240."
Summarizing the Trading Club meeting this month Lex van Dam said that 2016 has been a difficult year for many traders and investors, but 2017 looks quite hopeful - a lot to play for. "We will see some volatility, and there will be plenty of interesting trading ideas and themes going on; value versus growth – before you just buy the winners, but now maybe it starts to make sense to analyze stocks a little bit more in detail and see if they really have an economic reason for existence. So I think 2017 is the year where we can see if the emperor is wearing any clothes!"
Lex van Dam’s Trading Club provides access to our best trade ideas within FX, stocks and commodities each month and stay ahead of the action with our weekly market report. We hope you found this article interesting and insightful. For further discussion or to receive access to our monthly Trading Club meeting, join us at the Trading Club.
Disclaimer: Our service is intended for educational and informational purposes only and should not be considered investment advice. Do not make any decisions based on the articles and material presented on www.lexvandam.com and never trade with money you cannot afford to lose. We cannot be held responsible for your trading results.