2018 Forecast: $5-$8 Trillion Up For Grabs
I made my case forcefully in last year’s Forecast Issue that 2017 would be…
- a year of extraordinary profits despite overwhelming cynicism associated with one of the most contentious elections in U.S. history, and;
- that there would be far higher prices ahead, especially for three sectors: big technology, defense, and key medical providers.
That turned out to be well-founded advice and we were spot on yet again…
I urged you to “get on board or get left behind” and suggested you prioritize “Global Challengers” for income and appreciation as a way to maximize profits.
Many of our recommendations took off like a rocket, including iRobot Corp. (NasdaqGS:IRBT), NetEase Inc. (NasdaqGS:NTES), and Masimo Corp. (NasdaqGS:MASI) – all of which hit at least 100% and turned into free trades during the past 12 months. The S&P 500, by comparison, turned in only 18.66% over the same time frame.
A good number of our options plays, which I recommend as a more aggressive way to follow along with our recommendations, have done even better.
Plus, all ten of our 26(f) fund recommendations are in the green. Further, our “Big Tobacco” choices continue to kick off impressive amounts of income – and that’s always important for income-starved investors…
And finally, we’ve once again we’ve sidestepped much of the bond volatility that plagued other investors. Our core bond recommendations (NVG) and (RCS) are throwing off yields of 5.71% and 9.85%, which is terrific in a 2.48% world.
YOUR PATH TO PROFITS: GROUNDED IN THREE KEY PRINCIPLES
- Align your money with Unstoppable Trends backed by trillions of dollars that will get spent practically no matter what happens next. This is money Wall Street cannot hijack, Washington’s political cadres cannot derail, and the Fed cannot stop.
- Buy only the very best companies making “must-have” products and services characterized by rock solid balance sheets, near bullet-proof fundamentals, margin pricing power, global branding, and savvy management.
- Keep risk to razor-thin levels by buying value where and when we can find it and using specific tactics like trailing stops to continually harvest profits and minimize losses before they become catastrophic portfolio wipeouts.
2018: BIG OPPORTUNITIES & EVEN BIGGER PROFIT POTENTIAL
Let’s begin with the investing backdrop itself.
President Donald J. Trump may be the most polarizing president of all time but there is no doubt that he has had a fantastic impact on the markets and your money. The S&P 500, for example, has enjoyed a 24.05% rise since election night, which means it’s the third best first-year presidential rally since WWII, behind Presidents Kennedy and Bush Senior. The rally has created more than 70 all-time highs during that period, a new record.
Love him or hate him, President Trump’s vision remains a simple one – reform critical segments of our political system so that the economic drivers that made this country great, “Make America Great Again.”
Incredibly, despite some high-profile failures during his first year in office related to health care reform and immigration, the Congressional approval he needs for further tax reform, foreign policy, and trade appears likely as we head into critically important mid-term elections… all are great for your money.
I believe the bull market will continue to run through at least mid-2019 for three reasons:
- Monetary policy is converging with fiscal policy and that means there’s still plenty of money chasing the quality stocks we prefer.
- The need for real infrastructure development, technology, and defense spending overwhelms the potent mix of emerging populism and the war on inequality, which also is a net positive for markets because it means plenty of cash coming into the economy. And;
- Global growth is finally synchronized for the first time in a decade at a time when inflationary pressures remain low because of capital conditions, and despite central bankers’ efforts to induce a rise. That’s a condition the world has only experienced twice in the past 20 years – the late 1990s and mid-2000s – and a precursor to still more profits.
I see the S&P 500 breaking convincingly above 3,000 even as the Dow charges above 25,000 for the simple reason that there are very few imbalances potentially derailing capital formation – absent a major geopolitical surprise à la North Korea, terrorism, or a bio-event.
Global growth is accelerating at a time when the variation between many countries is the lowest on record since 1980, according to Bloomberg. That’s critical for a reason that escapes most investors: this means the U.S. no longer has to drive global growth even though many its companies (and our recommendations) will do just that (Fig. 1).
Profits, of course, will not be far behind, which you can see clearly in the Citigroup Global Earnings Forecast Revisions Index, which is tracking sharply higher (Fig. 2).
And, finally, global consumer sentiment is rising rapidly, which, of course, is mirrored by the world’s stock market valuations (Fig. 3).
I believe there’s another $5-$8 trillion up for grabs this year alone. My goal is to help you grab every penny of that we can.
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Key Market Themes in 2018:
1. DON’T BE SHAKEN BY SHORT-TERM VOLATILITY
There is no question the bull market is maturing but “de-risking” – a Wall Street term meaning taking money off the table – would be premature.
I expect volatility to rise in 2018, but that’s a short-term influence to be overcome with prudent stock selection and diligent risk management. It’s not an excuse to run for the hills, which is how most investors will perceive a long overdue pullback when it arrives.
Tactically speaking, the smart money – including us – will continue to prefer big, liquid stocks aligned with the Unstoppable Trends we follow. That’s especially true when it comes to companies making “must-have” products and services the world cannot live without. They are, at once, huge profit plays – but very defensive, too.
At the same time, this will dramatically reduce the nature and frequency of traditional pullbacks most investors look for but never find.
I see the probability of a pullback highest in Q1/2018.
Wall Streeters are looking to the Fed for guidance, but I continue to believe that’s fruitless. Team Yellen continues to struggle with models that don’t reflect today’s financial reality.
Technology, in particular, continues to be a deflationary input that confounds the Fed.
This creates three key capital flows.
- First, earnings will continue to accelerate, especially where stimulative spending and efficient taxation are concerned. This speaks to critical defense stocks, infrastructure plays, and medicine – all of which have large international operations and will benefit.
- Second, the Fed will fail to rein in credit even as it mistakenly focuses on liquidity. As long as that’s expanding, credit card companies and luxury goods items will perform well, so we’ll be pursuing opportunities here for the first time in years.
- And, third, equity market dispersion will create sustained demand for high-yield assets. The best choices will be companies growing into earnings and valuations most investors believe are expensive, but which really aren’t.
Dispersion means the gap between the price of the top 25% and the bottom 75% of equities, and implies that the markets are expensive only for those companies where there is limited or slowing earnings growth.
I don’t see much change politically speaking, and that’s an important emotional input we can play for big profits. Trump’s MAGA policy implies renegotiation of NAFTA and bilateral agreements. This will create a policy cascade (and headlines) that drive short-term market direction but do not derail longer term profits, nor the CEOs charged with producing them.
2. GLOBAL REALIGNMENT CONTINUES
China and Russia are drawing increasingly close, which gives investors a chance to broaden their investing horizon. This will be the year that China finally transitions to the global power it aspires to be based on global growth, earnings improvement, and business reform.
We will be returning to both China and Russia in 2018 with key opportunities that are likely to grow three to five times faster than comparable U.S. choices. There will be 222 Chinese companies added to the MSCI EAFE Index in May and that’s going to unleash an estimated $500-$700 billion in capital instantly when the world’s major indices have to rebalance – so we’ll be getting ahead of that, too.
I cannot understate the importance of this for the simple reason that China will account for 35% of global growth starting in 2018 – that’s double the U.S., which comes in second at only 18%.
Unbeknownst to most investors who still favor traditional allocation models, global integration is a major driver because it enables the transition from “old world economics” to dynamic “new world economics” and correspondingly huge profits. Like most investors, you can fight this emotionally all you want, but I’d rather see you get on board with the world’s best companies and the truly unprecedented profit potential they ensure.
3. PRICES ARE HIGH, BUT NOT YET IRRATIONAL
Current prices appear expensive but only in historic terms and only for companies without pricing power. In fact, when you judge them against the high level of corporate profitability, they’re reasonable. This seems inherently irrational for fundamental investors (and vice versa).
If the current bull market tracks 1990’s or even 2007’s peak, that puts the S&P 500 at 5,300 by 2020, according to Goldman Sachs and roughly 5,100 by my calculations. Either way, the path of least resistance and huge profits is higher, not lower, as many investors mistakenly believe.
THE BOTTOM LINE
I view 2018 very much as I did 2017 – a year that will be filled with profitable investment opportunities, especially when it comes to three of our Six Unstoppable Trends: Medicine, Technology, and War, Terrorism & Ugliness stemming from an (unfortunately) very ugly geopolitical situation.
Contrary to what many analysts believe about them being threats, all three are drivers when it comes to the pace of investment, higher productivity, and reinforcing profits that drive stock prices higher.
I also see a fresh crop of income investments coming of age this year, including companies like Sanofi (NYSE:SNY), ABB Ltd. (NYSE:ABB), and NextEra Energy Inc. (NYSE:NEE) that are not typically thought of as income plays, but which are returning capital to investors as fast as they can. Rates will remain lower than the Fed would like for reasons Team Yellen (unbelievably) still cannot grasp.
Once again, it will be “better to be long than wrong” in 2018!
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