This week, I’m making my predictions for 2017 based on the 16th annual Barron’s forecasting challenge. I answered the first two questions yesterday, which you can find here.
Today, I’m tackling two questions, starting with naming the top performing sector within the S&P 500. There are 11 sectors and Barron’s is offering five choices, so technically, it’s not the best sector, but the best sector of the choices that Barron’s provides us.
The choices are as follows: healthcare, energy, technology, financials or consumer staples. Truthfully, I think that my odds here are no better than one in five, but since I have to pick one, I’m going with healthcare.
Healthcare was the worst performing sector last year, but that’s not really my rationale. For this, I looked at research from Morningstar, who does bottom-up fundamental research and creates a discounted cash flow (DCF) model for nearly all of the stocks in the S&P 500.
Their analysis suggests that four of the five sectors that Barron’s gives us to choose from are basically trading at their fair market value – not cheap or rich. They estimate that healthcare, on the other hand, is trading at 87 cents on the dollar, compared to 94 cents three months ago.
Morningstar argues that even though Republicans control the White House and the Congress that they don’t expect changes to drug pricing policies. They believe that changes to the Affordable Care Act (Obamacare) are likely to be focused on repealing mandates and loosening overall regulations.
Next, Barron’s asked what will be the year’s biggest financial surprise. I like the ‘surprise’ framework, first used in financial markets by Byron Wein, because it forces you to think about how your own estimates could be wrong.
They offer six options:
- Trump is bad for stocks; the S&P 500 falls over -10 percent.
- Gold glitters and rises to more than $1,500 an ounce.
- The strong economy lifts US 30-year bond yield to over 4 percent.
- Emerging Markets stocks rally, MSCI index gains 15 percent.
- Bear market in crude oil; WTI ends the year below $40 per barrel.
- None of the above.
Last year, there were no surprises (ha!), but I would really be surprised if the 30-year bond yield rose to over four percent. I do think the economy is likely to pick up this year, but not enough to justify that kind of move (right now the 30-year yields 2.99 percent).
The bond market doesn’t expect yields to move much this year either based on forward curves.
Keep reading the rest of this week as I continue to play Barron’s forecasting game.