Thursday, December 8, 2016

Big stock moves possible in 2017

Following the presidential election, the US stock market confirmed what had already been a new uptrend in 2016. PMIs and GDP have been strengthening since a weak first quarter. Steel and copper prices have risen meaningfully, breaking their downtrend.

The question I'm trying to figure out now is how does the stock market move in 2017 and 2018. It certainly looks headed higher with money moving out of bonds into stocks. One unusual scenario keeps picking at the back of my brain: the stock market may go up 40% the first half of 2017 then crash in the fall, much like 1987. We haven't had a true 20% bear move since 2007 and it does seem likely we get a move like the 1987 blowoff before the market resumes a strong uptrend.

Two reasons point to a possible big move up and down. The first is that retail investors are finally getting back into the stock market. Politically conservative American have kept their money out of the market due to irrational political bias under the Democratic president. They now feel all is well again and are putting their IRA savings back into stock funds.

My second point of logic is investors are buying cyclical stocks on the belief the new Congress will eliminate banking regulations, repeal the Affordable Care Act, force corporations to repatriate overseas profits, and pass a large infrastructure spending bill. Republican legislators are still fractured and will not pass all these measure. We likely see Republican legislators basking in the glow of a Democratic defeat the first 100 days, then returning to their inflexible stances that have frozen Congress the last six years. (The ACA likely is repealed pretty quickly.)

One hundred days after inauguration puts us in May, and Sell in May could be the smart move in 2017. But all this is speculation, I have no clue what will actually happen. Experts see the most likely move is a 10% drop after the inauguration, because that is what typically happens.

If we do get a huge move up into May 2017, I will sell half my stock holdings and move that money into bonds, gold, and a VIX ETF. One last note that most people forget, the stock market was actually positive by the end of 1987.