Predictions for 2018

When reviewing our predictions for 2017, the biggest surprise was that we actually got a few right:

  1. Inflation begins to become a concern.
  2. U.S dollar peaks.
  3. Official U.S. deficit for fiscal year ended 6/30/17 exceeds $600 billion.

Yet the stock market ignored all of this bad news and rallied, with the S&P 500’s total return over 21%.  Large cap tech stocks did even better, reflected in the Nasdaq 100’s 38% rise.

Our picks for best performers on average outperformed the S&P 500 while the worst performers underperformed:

Best:

  • Wal-Mart (WMT): +46.56%
  • Dollar Tree (DLTR): +39.04%
  • Illumina (ILMN): +70.64%
  • Bristol Myers (BMY): +7.71%
  • Fertilizer stocks (POT, PHOR.ME)

Worst:

  • Global banks (DB, CM, WBK): +16.06%
  • Investment banks (GS, JPM): +17.84%
  • Auto finance (AN, KMX): +6.41%
  • Municipal bond insurers (AGO, MBI): -21.88%
  • Office REITs (BXP, SLG, VNO): -6.41%
  • Retail REITs (GGP, O, PEI, SPG): -6.76%
  • Technology (XLK): +34.25%
  • Industrials (XLI): +23.99%
  • Chinese financials (CHIX): +53.60%

Our predictions for 2018:

1) The bubbles in blockchain, cryptocurrencies, and cannabis all burst.  Bitcoin ends the year under $5,000 (and possibly under $1,000).

2) Global bond markets continue the bear market that began July 2016.  The yield on the U.S. 10-year note, 2.40% to start the year, ends over 3.00%.  Government and corporate bonds sporting negative yields ($10 trillion currently) drop below $5 trillion.

3) Global stock prices peak in the first quarter.  The S&P 500, which hasn’t had a 5% draw down in a record 400 trading days, ends the year down at least 15%.

– best performers: genomic sequencing (Regeneron Pharmaceuticals), discount retailers (Target, Wal-Mart), retail roadkill (Bed Bath & Beyond), offshore drillers (Transocean, Ensco), natural gas E&P (Range Resources)

– worst performers: Tesla, global banks (Deutsche Bank, Westpak Banking, Canadian Imperial Bank), Chinese financials (CHIX), auto finance (CarMax, AutoNation), municipal bond insurers (Assured Guarantee, MBIA), passive investing (BLK, MSCI), office REITs (Boston Properties, Vornado), retail REITs (Simon Property Group, Realty Income), technology (XLK), industrials (XLI), infrastructure (Caterpillar, United Rentals).

4) The U.S. budget deficit goes from roughly $700 bil to over $850 by the end of 2018, despite an influx of repatriation taxes.  Higher debt service costs begin to become a concern.

5) Nascent global price inflation proves to be unshakable.  Gold and other precious metals benefit, helped also by less competition from digital currencies.  Gold mining stocks gain from the added tailwind of reduced costs relative to gold – especially fuel and equipment – and lower regulatory costs courtesy of the Trump administration.

6) Commodities will be a mixed bag with food commodities generally higher and economically-sensitive commodities lower:

– strong: coffee, wheat, natural gas

– weak: lumber, copper, crude oil

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