In the case of equities, as you know, I am constructive. I am calling for the Dow Industrials to close out 2017 at 22,900. My 2017 year end target for the S&P 500 is 2602 and my target for the Nasdaq is 6425.
WTI crude will likely lose a degree of its historical volatility in 2017 and in the process be relatively range-bound between $40/bbl and $60/bbl. I suspect year end we are closer to the high end of that range as global consumption is likely to accelerate in the year. Between OPEC and non-OPEC production limits having been established, acting to support prices, and the shadow of US shale production coming online at the high end of the range and acting to contain prices, a range bound trade is expected.
Gold will continue to have headwinds as a result of a stronger US dollar due to rising US interest rates among other factors. Baring a major Geo-political calamity, I expect gold to close out the year marginally lower than Friday’s close of $1,135/t oz, at $1,000/t oz.
As was evidenced by the most recent FOMC Announcement, rates are expected to move higher in 2017. My expectations for rates however is that we will not see more than two moves by the Fed in 2017. The first move in 2017 will likely come at the close of the first half of the year and the second is likely to come at the close of the year. The Fed remains data dependent and though the data does speak to the wisdom of having raised rates this month, the future flight path of inflation remains a bit undefined and heavily dependent on wage gains, consumer price and wage inflation. With the expectation of relatively stable energy prices, continued employment gains and a fractional uptick in GDP in 2017 (+2.7%), inflation should still remain relatively well contained though hotter than what we have grown accustomed to the post financial crisis world. The 10-year closed out Friday yielding 2.54%. By 2017 year-end, I expect the 10-year to yield 3.15%.
The largest variable for investors to gauge in 2017 will be the Presidency of Donald J. Trump. My sense is that we can certainly expect an environment defined by aggressive fiscal spending, lower personal and corporate tax rates, marginally lower unemployment, a marginally higher labor force participation rate, a modest expansion in growth and uptick in inflation. I also expect Washington DC to become a global stage - a battle field where vitriol is exchanged at a level and pace that will cause the faint of heart to cringe. That said, DJT will likely largely get his way in his efforts to trigger more dynamic economic growth given the construct of the Senate and House.
Cracks in the disfigured EU façade will grow larger as populism continues to gain ground and popular support across the continent. Front and center will be France and Germany in 2017 just as the United Kingdom and Italy were in 2016. The likelihood of parity for the euro with the dollar will be realized as a result of the internal political strife in the EU zone, stagnant growth and also as a result of a rising US dollar. Negative sovereign yields will remain a constant on the continent as growth will continue to elude the ECB and Brussels. Meanwhile, the UK will continue to post economic outperformance relative to its European peers. Brexit will be officially triggered by the passing of resolution 50. The United States and Britain will begin work on a trade deal that will redefine one of the oldest alliances on the globe. Greece will balk at any further concessions to the EU or ECB, in the process triggering the potential for yet another referendum only this time, the outcome is less certain.
The fissures that have quickly developed in Sino-American relations with the advent of the Trump Presidency will grow increasingly more course and heated in 2017. Territorial aspirations on the part of China in the South China Sea and elsewhere will be met with stubborn resistance by the United States, the largest increase in Japanese military spending since World War 2 and a period of managed political/economic uncertainty. Traditional US allies will once again underscore their defense priorities to SEATO. The TPP dream that was held as a template for global growth will evaporate leaving many globalists in retreat. That retreat will be buttressed by the traction found by populists in Europe, “America First” foreign, political and economic policies in Washington and a Federal Reserve that will be forced to implement a monetary policy that will run counter to the global trend and the wishes of the IMF.