2017 Forecasts: Part IV

So far, you all aren’t getting tired of these forecasts (guesses), but before we start, I want to make a quick note: yesterday’s stock related forecasts made heavy use of Morningstar’s discounted cash flow (DCF) models.

I don’t want you to get the impression that we use these models so heavily in our stock selection process since that just isn’t the case.  At some point, I will offer more details about this process.

I like and routinely refer to Morningstar’s models and stock research, but we don’t rely on it as heavily in our investment decision making process as you might have guessed from yesterday’s post.

Now let’s get this party started!

Question 7: Where will oil prices (WTI) finish 2017?  Oil traded around $53 per barrel at the start of the year. 

As I noted last year, I think that this is a truly impossible question since oil may be one of the few assets that is more volatile than the stock market.  I would say that it’s more like a single stock, and a volatile one at that.

With that as a strong caveat, I am going to say that it will come in between $56 – $69 per barrel (choice C on the quiz).  The first two suggest another selloff in oil, which seems unlikely to me at this point since I do think the economy is likely to be stronger this year than it has been over the past eight years.

The other ‘bullish’ choices call for oil to close over $70 per barrel, which seems like too big of a leap to me.  Of course, oil could jump 32 percent, which is what that answer implies, but I would be surprised.

I also think that it would be a big negative since higher energy prices act like a tax and would offset some of the economic benefits that should come from lower taxes, lighter regulation and fiscal stimulus.

Question 16: Where will the 30-year Treasury bond end 2017?  It closed out last year around 3.1 percent.  

  1. Under 3.0%
  2. 3.0 to 3.5%
  3. 3.5 to 4.0%
  4. Above 4.0%

This is one of the questions that we ‘answered’ at the Investor Social last week.  The crowd and I both thought that the 30-year bond yield would land between 3.0 and 3.5 percent (Answer B), which is what the bond market also thinks, based on forward curves.

In the third question that we answered at the Social, I said that I thought it would be a big financial surprise if the 30-year ended the year over four percent.

This afternoon, Ryan Craft, our chief bond analyst and all around good guy showed me some work that showed that the bond market always thinks that rates are going to go a little bit higher.  Well, not always, but you can guess what the forward curves will say just by looking at the current yield curve.

I only looked at it for a few minutes and it takes a while for big, new ideas to sink in to my brain, so I’ll have to say more about that in a future missive after Ryan has explained it to me a dozen or so times.

Tomorrow will the last day of guesses – I mean forecasts!