The Trump administration will usher in a lot of change — conventional or unconventional — that could propel the stock market and economy out of slow growth. But the participants in our annual Investors' Roundtable said there could also be some pain along the way. One likened the president-elect's campaign and behavior since the election to "creative destruction," the cost of unorthodox thinking that spurs beneficial results. That's one reason they are less bullish overall than they were a year ago, forecasting a 3.6 percent jump in the S&P 500. Our nine panelists were more united in outlook this year, with an 11 percentage-point difference between the highest and lowest forecast. Last year, there was a 29 percentage point difference in their forecasts. One area of agreement was how to invest in the early Trump years — in energy, infrastructure and banks.
There has been a 35-year bull run in the bond market and an eight-year run in the equity market. How far can these markets run?
David Joy: Well, I would say on the bond side there's probably a pretty good chance that the bull market is over. We don't expect bond yields to be rising dramatically from here, because we don't see inflation as a big problem, but some inflationary pressure is building over time. On the stock side, I think it has a little more room to run here, especially if we get some policy initiatives next year that are favorable in terms of tax reform and some fiscal stimulus. I think stocks can again move higher in that environment.
Roger Sit: I would agree with that, but on the stock market side, I think it will move higher for different reasons. The last eight years, the equity markets have really moved higher both in the U.S. as well as abroad, because of quantitative easing and extremely low interest rates. Going forward, we are going to shift from an environment where those have juiced the whole market up to an environment where it's going to be stock picking, where fundamentals are going to matter, because fundamentals will allow for stock price appreciation and sustaining that price appreciation.
Carol Schleif: Back to the fixed-income piece, the death of the bond [market] has been in process for many years, and a lot of us have been positioning and trying to call for it much sooner than it is. I would suspect by the time this prints, your readers will be seeing losses in their bond holdings for the first time in many of their experiences.
Jim Paulsen: This is a very calendar-old recovery, being now in its eighth year. But I think it's character-young. I really do. If I go through recession risk — economic policies have not yet turned negative anywhere in the world, and since 1970, when the Fed starts to tighten the funds rate, it's, on average, four years until the next recession, so we haven't even begun the process. Because we never generated confidence in this recovery, it's been a recovery without confidence in the future. I think before it's over, we'll get that.
To what degree will the market's post-election rally encourage President Trump to focus on growth rather than take some of the steps he's talked about that might limit it?
Sit: As long as the administration does something that pushes you in the direction where you think — and I want to emphasize where we all think that it's good for growth — then it's going to continue the bull market, and it's going to continue the bull market in more cyclical stock, even though they're not necessarily cheap. But with that said, he's going to get a grace period, six to 12 months from when he takes office, to show he's moving in that direction. If it doesn't move in that direction, then all bets are off.
Biff Robillard: I have an interesting statistic. If stocks peaked in the first quarter of 2000 and you just calculate — it was 1,400 something on the S&P, and it's 2,200 on the S&P today. Excluding dividends, the compounded growth rate is 2½ percent for 17 years. So that's an amazing number, and it seems really low to me. So if you look at a secular peak in the stock market in 2000 — and we've gone through this tremendous sideways — I think that's very relevant to what will happen next with stocks.
Paulsen: I think that Trump is like the tail, and the dog in this fight is the fundamentals of the economy, and, quite frankly, a lot of these trends that we now associate with the Trump election were in place starting in the summer. But I would say that Trump exacerbated those trends with hope. I've been critical throughout this recovery about the leadership not treating confidence. To me this forevermore is going to be the destructive confidence recovery. I think it's because the leaders have chronically told us that we're this close to the second coming of the Great Depression every day, and our Federal Reserve, without saying a word, is screaming, 'We're very scared about the future, and you should be too,' in their actions. And here's this guy with this big cap that says let's make things great again, and he's screaming about how great we're going to grow, 8, 9, 10 percent, whatever else, and I'm sure it's all pie over the moon, but the initial impact of rising rates and inflation is positive.
Sit: [Trump is] also smart enough to realize he doesn't want to fail, and he knows if he starts doing stupid things on trade, stupid things on competitiveness, he is going to fail, and that is his probably biggest nightmare. So he has surrounded himself — if you look at the cabinet picks so far — with people who understand and have been successful, because he knows he can't afford to fail.
Craig Johnson: President Trump does not want to fail, but certainly there's going to be more volatility. You go all the way back to the 1920s and you look at the annual trading range for stock, for the S&P 500, on average it's been about 27 percent, from the open to the high to the drawdown, etc. I would suspect that you're going to get an above-average year in terms of volatility, which I think will be very good for active managers.
If we are at a market inflection point is this a time for investors to think more widely about how they should rebalance their portfolios?
Mark Henneman: I think that the strategy for success over the long term is to pick your process and stick with it.
Sit: Well, I would argue that you should always be attentive to your asset allocation at all times, not only by sectors but by passive vs. active. I think there's a time you can be invested in passive instruments, and there's a time you can be invested in active. Passive works very well when there's very low volatility. Now, to what everybody is saying here, I think it's consensus that volatility is going to probably pick up, because the question is, is how successful will President-elect Trump be? And so with that increased volatility, it tends to be a better environment for active vs. passive.
Martha Pomerantz: The bottom line is, is [people] should have an asset allocation that works for their particular circumstances. And now we're just talking about making tactical shifts at periodic points in time, but when you think about wholesale rebalance, I don't think any of us would argue that you should take all of your bonds and you should put them into stocks right now.
What should readers know about trade agreements going forward, especially in the new administration?
Robillard: It's clarified my thinking to get familiar with the term globalism in contrast to globalization. Globalism is sort of a political movement that we've been living for 20 or 30 or 40 years, which is sort of the E.U., when you think about it. Globalization I think of as purely an economic phenomenon. And so you have a candidate [and also] Brexit, which sounds like an anti-globalization campaign — but I think the markets and capitalists are hearing an anti-globalism message. So this weird thing is what looks like more protectionism may be a much more market-driven trading, sort of putting economic interests behind the social interests. You know, it may be surprisingly pro-trade.
Paulsen: I come back to this idea — these trade issues and Trump issues are the tail, and then there's the dog, and the dog is a bigger beast. And while maybe Trump restricts trade to the United States, the bigger dog issue is the fact that all trade is going up. So even if our trade gets restricted, we might still see more of it just because global trade is going up. I just noticed for the 13 top economies, the last six-month leading indicator is up in all 13. This is the first time we've ever had that happen in the entire recovery. Even if we have restrictions here in the United States, we might still see more trade.
Joy: You know, one of the issues on the Trans-Pacific Partnership is that it appears to be stalled at maybe best, dead at maybe worst. But we have never signed it. This is not a trade agreement that's in effect, so we're not losing anything in that respect. And what Trump has been saying is we want smart trade. We all want better deals. So if you take him at face value, there's been a lot of groundwork that's been done that might be valuable, but let's take a fresh look at it with a new set of eyes. And the new Commerce Secretary nominee [Wilbur Ross] has some experience, at least, with trade. So that might get revived down the road. It might surprise us all.
Lisa Kopp: If you look back to the nature of trade agreements, something that people don't actually realize is it's not just about barriers to entry. Today's trade agreements have less to do with actually taking away tariffs or barriers to entry and more about regulating the structure of patent agreements and sort of how you play — for example, child labor laws. So, yes, we may lose some great things, if it doesn't go through — and, again, it looks like it's not going to go through, given Trump's bent — but it may actually have less impact on trade than people would assume.
Are we going to see more or less business regulation going forward?
Henneman: That's the one part of the Trump trade I'd be willing to bet on, that regulation is going to decrease. The pendulum has swung too far, and this is the catalyst we need to get it swinging back the other way.
Sit: I agree with that. And let's take, for example, the banks. I mean, Dodd-Frank, it's a one-size-fits-all. There's no differentiation being made between JPMorgan, Bank of America, versus a smaller regional bank. They're the same regulations. I think there's overregulation that they need to re-examine and say, OK, what really makes the most sense for the situation versus one size fits all?
Talk about some sectors where people can be excited about allocating their investments.
Pomerantz: I think consumer stocks are going to do better. There are so many things that are going on here — repatriation, more money comes back, tax rates go down, more money in consumers' pockets, people feel better about things. I think already you're seeing some impact to that early on.
Schleif: In the environment we're in now, if you're going to spend on infrastructure, you're going to spend on technology as well. There were over 70 voter-led referendums that generated over $70 billion worth of municipal bond issuance that's set to come in the next few years. [Look at the new 35W bridge.] It's got a lot of technology in that bridge that got put back up. Also from a capitalization standpoint, one of the biggest beneficiaries of bringing individual and corporate tax rates down would be small and mid-cap stocks. You've seen them rally hugely.
Johnson: From my perspective in terms of where to be positioned for 2017, we're overweight, and have been since about August, in energy, we're overweight in basic materials, and we're also overweight in tech, because that should be a natural beneficiary. We're underweight in the interest-sensitive areas, such as more of the bond proxy areas, utilities, consumer staples and our communication media group.
Joy: I would agree on the energy front. Another area within industrials I would say is defense spending, probably going to be a big beneficiary of increased spending at the federal government level.
Sit: You have to look at some companies that have a lot of overseas cash, because if they can repatriate that at even a 10 percent rate, that's a lot of capital that they can use for further growth, share buybacks, whatever, and that should be helpful for their stock prices. On top of that, I think we've got to look for companies that have a higher corporate tax rate right now, because if there is a change in the corporate tax laws and you can bring down that tax rate, there is more money flowing to the bottom line for those companies as well.
Kopp: We actually believe that there's a broader opportunity next year than there may have been coming into 2016, and the reason why is you have some sectors that we thought were already attractive — like the consumer discretionary and health care and technology that were attractive both on some of their bottom up opportunities for innovation, but also some of the top down tailwinds like the aging consumer or e-commerce. But in addition to that, you have had a change in the environment with the reflation trade and with the lowering of tax rates, things that should help some of the cyclicals, like the industrials and the materials and the financials. So we actually see that there may be more groups, potentially, that could do well in the next year.
Henneman: I think, to Roger's point, that it's going to be a stock pickers' market, is right on, and making sector bets is not something you really need to do when you're in that environment. We've got a long-term overweight in industrials, but we're not adding new money there, but there's individual names, and they can be just kind of anywhere, and we're seeing Medtronic and Hormel just as really attractive right here. There's really no theme to that. It's just finding opportunities of great companies when they're on sale.
The S&P 500 closed 2016 at 2,239. What are your S&P 500 predictions for 2017?
Henneman: I'm 2,250, just kind of the impacts of full valuation, rising dollar. We'll see about that. I don't know where it's going, but I do know it's high right now, and I've got those comps coming at me, which, frankly, I think is just fine.
Sit: 2,300. I'm assuming we get about a 5 percent earnings growth. And like I said earlier several times, I think it's going to be based on fundamentals. It's going to be a stock pickers' market.
Pomeranz: I'm going to say 2,375. I think it will be a good year. I honestly think in the last two years we've sort of come back to even. Two years ago, the market was essentially flat. This year, we're up 10 percent, so we're up 5 percent over two years. I don't think this is an egregious amount. I think taxes will come down. I think earnings will improve. I think consumer sentiment and investor sentiment will be favorable. I think it will turn out to be an average year for us next year.
Paulsen: I'm going to go 2,325. I think it's going to be a wild year that has echoes of 1987. I don't think it will be near the magnitude, but I think some of the character will be similar. We get pretty excited about stuff, and for a while we trade up on higher inflation, higher rates, it's all good, cyclical led, and then we have a little bit of an air pocket at some point in the year, and we end up not that much higher, 5 percent or something, from where we started.
Robillard: I'm going to say unchanged, 2,190. I'm with Jim, much higher and then about the same for a while. It's the first year of President-elect Trump's deal.
Johnson: Perhaps I'll be the high-water person on the Street, but we're looking for 2,424 for next year. We're also looking for 3 to 3¼ on the 10-year bond yield.
Joy: We're at 2,350. We think earnings growth is going to be around 9 percent, and economic growth in the U.S. improved to about 2½ percent. I think the Fed raises only twice, and so multiples don't come under real pressure, and that gets us to 2,350.
Schleif: I'll be the odd one out. I'm going to say 2,317. We do think that volatility will be increased, and wouldn't be surprised to see sharp upticks and downticks. I do think inflation most likely will surprise on the upside. Overall, I think the sentiment has turned, and we are optimistic about business confidence and where the markets could end the year.
Kopp: We were going to come in at 2,350, so now maybe I have to say 2,349. We're assuming, basically, a similar multiple to today, but we are assuming some decent earnings growth, and so we're thinking somewhere in the single mid-digits is going to happen, and it's really based on the fact that we see some good bottom-up opportunities with companies. Top down still looks OK. GDP is coming in at decent, maybe slightly accelerating, and the overseas economies are doing all right.
