Market Strategy Radar Screen Weekly January 03, 2017

  Here We Go Again…Taking a Chance on Love

With apologies to Frank Sinatra, we paraphrase him as we reflect on the Bull

Bears and skeptics to this market have sought out black swans, bolts from the blue, and even Armageddon itself only to come up short and be proven wrong repeatedly since March 9, 2009, as the bull has climbed a wall of worry. It’s not been an easy hike up the wall for the bull market as it’s come with detours and some doubtful moments along the way, a near eight-year journey of thrills and spills of varying degrees and proportions.

There’ve been recoveries, rebounds, reversals and turnarounds─and all with the participation (willing or otherwise) of a cast of billions of people around the world affected in one way or another by the vacillations and inter-market relationships among asset classes and their valuations.

Capitalists, socialists, communists, anarchists and populists, iconoclasts and ideologists mixed by nationalities as diverse as Russian, Brazilian, English, French, Japanese, Korean, Chinese, Mexican, Israeli, Saudi, South African and Nigerian (and too many more to mention)─the whole world embroiled in a process of global and technological transitions, complicated by layers of global politics, and even demographics to boot.

The mere complexity of the process explains why the arguments for and against the process of economic success or failure are so convoluted.

Trojan horses, thousand-year wars, rivalries and political bifurcation of such rancidness with deeply embedded risks have raised their respective heads with regularity over the last eight years and been amplified on a globally digitalized grid of information. And despite it all, the stock market has managed to move nicely higher.

And so here we stand on day one of trading: dateline 2017, New York.

Where to from here…?

We expect investors will once again benefit from patience, right-sized expectations, knowing what they own, why they own it, and having a general idea of how their assets are likely to perform over the day-to-day action that will encompass the year ahead.

We think there’s plenty of good news likely ahead to hang our hats on tied to economics and corporate earnings boosted by a fiscal stimulus that mostly likely lies ahead.

So far whenever the term “animal spirits” has appeared in market commentators’ prose, we’d note that almost instantly these said animal spirits tend to disappear

Consider the fourth-quarter momentum, which took the Dow close to 20,000 and the S&P 500 close to our 2016 target of 2300 in the waning days of the year, only to see that year-end rally fizzle out as rebalancing by institutional managers trimmed the sails and escorted in an interlude of a “risk-off” stance for stocks but provided a modest rally in bonds and REITs (we were happy with this as we thought both asset categories had become oversold in the fourth-quarter surge higher as inflation was projected to run higher than it now appears to be running near term).

There is still too much worry and responsible rotational action surrounding this bull market to think that it is about to end.

Usually it is when the crowd “dances naked around the maypole” (also once famously called “irrational exuberance”) that lightning strikes.

For now the fundamentals continue to improve and appear to support sufficiently the sustainability of the current economic expansion stateside.

Beyond that, signs are gradually becoming apparent on our radar screen that a global economic recovery is beginning, following in a path parallel if not similar to that of the earlier US recovery.

For now, we anticipate that the markets in the near term will settle into a first-quarter process of price discovery among asset classes that will take several weeks (assuming no unforeseen economic, market, or geopolitical catalysts) that could apply further definition.

We plan to keep a close watch on what we believe will be a further rally in bonds and REITS ahead as the inflation and growth projected in the postpresidential rally fade into the reality of a potentially many months-long transitional period before the actual effects of stimulus programs that are yet to be launched (and in some cases yet to be defined).

Once the markets can configure the timeline that lies ahead for the stimulus programs (their approval processes, launch dates, etc.), the markets will begin to discount more accurately or with more clarity perhaps what lies ahead.

We continue to believe that the market as reflected by the S&P 500 has a good chance to reach a level of 2450 by the end of this year with earnings in 2017 potentially rising around 15% (over 2016) with a P/E market multiple at close to 19.5x.

In our view, 2017 is likely to mirror 2016 in that gains will have to be earned rather than easily found.

At the start of this year we’ll keep the party hats in the box and the shoulder to the wheel with a commitment to exercise patience and have a readiness to improvise as the calendar pages turn.

For the complete report, please contact your Oppenheimer Financial Advisor.

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