2017 Forecast: Part 1

Last year, Barron’s offered their readers a chance to test their forecasting skills by asking a number of multiple choices questions about what might happen in 2017.  I answered some of the questions in Daily Insights last year here and here.

I revealed how my answers fared at our First Annual Investor’s Social last week, which I thought was a great success.  I want to thank everyone for coming and said that I would post my 2017 forecasts shortly, which I intend to do this week, starting today.

We don’t use these forecasts in our investing process and one person understandably asked why I made the forecasts and went through the answers.

The reason why I made the forecasts was to illustrate how I think about markets, for better or for worse.  As for looking at the answers, it was simply an organized way to look at what happened last year that I thought would be fun.

There are sixteen questions and I think I can answer all but two of them this week (the last two involve specific stocks on our Approved List and I’m not supposed to talk about those for compliance reasons).

The first question ask what the Dow Industrials (DJIA) will return in 2017, including dividends.

Last year, I said that I thought that the DJIA would end the year somewhere between flat and up 10 percent.  I was wrong because stocks popped after the election; but I wasn’t alone, only 19 percent of respondents to the quiz got this question right.

The broader context is that for three years now, I’ve thought that the US market is overvalued and expect lower than average returns in the coming years (I think that about the S&P 500, which is highly correlated with the DJIA).

So far I’ve been wrong, but I’m not too sad about it because US stocks have risen 30 percent.  This year, earnings are expected to improve, but I have to wonder whether the market valuation can stay as elevated as it is now.

Next, Barron’s asks which equity market will do best in 2017 in local currencies – the S&P 500, the Europe Stoxx 50, the Japan Topix or the MSCI Emerging Markets index.

Last year, I said I thought emerging markets would fare best and I was looking pretty good until the election.  After that, the S&P 500 took first place and emerging markets sagged.

My 2017 prediction is the same for the same reason: US stocks are trading at higher than average valuations, developed markets are neither cheap nor expensive and, in my opinion, emerging markets are cheap.  Last year, a third of respondents correctly said that the S&P 500 would fare best.

That’s it for now, but I’ll be back with more questions and answers tomorrow.