I begin my 2017 stock market predictions with a recap of last year's predictions. In an article back in 2015 titled "The Epocalypse: What Will D-Day Look Like?" I predicted the Fed would raise rates on December 16th, 2015, and the US stock market would crash immediately. Counterintuitively, I said it would crash by shooting upward for a few days; then it would round off, and then, in a short time, it would plunge off a cliff. (In all not a pattern you'd likely find anyone else predicting.)
I said the stock market would crash by going up because everyone would look around after the long-dreaded day of the Fed's first rate hike and see that the sky didn't fall. That would turn them all smarmy and euphoric over how right they were about the recovery and about the bull market. That would, in turn, give rise to their hopes of a bull market forever and never ceasing. However, parties lead to hangovers. Once you recover from the hangover, reality sets in. That's when they would begin to panic as they looked around, saw all the bottles and underwear and said, "Oh, my gosh, what did we do last night?"
How my 2015/2016 stock market predictions did
That is EXACTLY what happened (perhaps even including the underwear). January became the worst opening month in stock-market history. Now, to be fair, I also said that globally 2016 would turn into the "Year of the Epocalypse," and it didn't. (More on that in my next article of 2017 economic predictions, but you have to admit it was one darn weird year, which I think was only the warm-up act for this year.) However, as part of the economic apocalypse I predicted for 2016, I described the following blowup:
Movement from bond funds to stocks will accelerate the bond implosion, wiping out billions in paper wealth on the high-yield bond side. Unfortunately for the market bulls, such mega-bond crashes almost always lead directly into stock-market crashes.
The bond implosion took a lot longer to begin last year than I thought, but it finally got up to speed after Trump's election, from which point it wiped out more than $13 billion from US bond funds (over $60 billion lost for the whole year) and surprising $1 trillion from all global bond markets (if CNBC's numbers are right):
'Trump Thump' whacks bond market for $1 trillion loss
Donald Trump's stunning victory for the White House may mark the long-awaited end to the more than 30-year-old bull run in bonds.... A two-day thumping wiped out more than $1 trillion across global bond markets.... "We've had a sentiment shift in the bond market. People have already started reallocating out of bonds and into stocks, said Jeffrey Gundlach, chief executive officer of Los Angeles-based DoubleLine Capital, which has more than $106 billion in assets. ~ CNBC
As I predicted last year, 2016 would be the year when billions would flow out of US bond funds and into stocks because "the money needs somewhere soft to land." As I mentioned a week or so ago, the Trump rally has less to do with enthusiasm over the Trump plan and more to do with near-panic in the bond market sending a lot of bond money into stocks.
If this flight from bond funds does become an complete bursting of the bond bubble, that is ultimately going to hurt everything, including stocks; so it is not the salvation of the stock market, other than temporarily.
Many were not certain the Fed would raise rates on December 16, 2015, but I was because the Fed would have lost too much public confidence if it did not. It had been telegraphing its first interest increase all year long plus half of the year before that. To not raise interest at all during 2015 would have been a disaster. By revealing the Fed had no faith in its recovery, it would have deflated the Fed's whole hope balloon, filled with nothing but hot air anyway.
It was easy for me to see the stock market would fall at the end of 2015 and into 2016 because the first interest-rate increase in years would change the sick dynamic in the market where bad news was good news because it always resulted in hope of more Fed free (or cheap-and-easy) money. With QE ended and interest rates starting to rise, bad news would finally start to become just bad news ... and there was a lot more bad news in the pipeline than good.
It was also easy to see that pent-up emotions would burst into euphoria once we made it past the long-dreaded day of the first increase, and it was easy to see there was no underlying strength in the economy and no new plan for the economy, so no reason for the stock market to rise, other than that euphoria. Thus, fall it did. No surprise here.
My 2017 stock market predictions: The Trump slump
This year is not as easy. Things are much more complicated now. Trumphoria has run even higher than last year's "irrational exuberance" (as Greenspan termed it), but it comes with a new plan that is vastly different than all preceding years, which could give some serious temporary economic boost. (It doesn't resolve ANY of our underlying economic problems, though, and it makes the biggest of those problems (national debt) far worse; but it has also too much mojo to be ignored.) It is an enormous tax plan, and an economic change like that always creates a lot of money movement. So, there will be many shells in this game moving in many directions, making it harder to see where the peanut ends up (if the peanut you're trying to watch is 2017 stock market predictions).
Partially due to the Trump plan, the Dow Jones Industrial Average saw one of its fastest rates of rise in history during the weeks that followed Trump's victory at the polls. The victory was a great surprise to many, but I had been saying on my blog that, if anyone had closet voters that the pollsters couldn't see, it would certainly be Trump; so, I wouldn't be surprised by a Trump victory. I was, however, as surprised as anyone by the Trump stock-market rally. I hadn't predicted the stock market would immediately crash after the election, but I certainly didn't expect it to soar because I figured Fed support for the market would wane.
Prior to the Fed's rate increase this December, which everyone else was as certain of this year as I was, I predicted the opposite effect from last year's first hike. I said the Federal Reserve's interest increase would be irrelevant, and it was! The stock market paid little attention this time because bond interest had already been rising, and it didn't rise any faster after the rate increase. Mortgage rates had already been rising, too. In short, the markets were already pushing interest up faster than anything the Fed is doing anyway.
If anything, this indicates the Fed is losing its grip on interest rates as market forces overwhelm them. The Fed could, of course, re-establish that grip with another massive stimulus program, but that is something they are loath to do. They have no desire to show their recovery has failed by scrambling to save it. They have no interest in helping Trump who has only badmouthed them (deservedly). If their recover is going to fail, they'd probably rather it fails at the start of Trump's watch to cast a hex over everything he does. Besides, the interest hikes they have wanted to make but couldn't are now an easy rise for them, which is why they've comfortably slated extra increases this year because they are just pricing into what the market is already doing.
How easily can euphoria give way to a 2017 stock market crash?
In my recent article, "Irrational Exuberance in US Stock Market Grasps at 20K for Dow," I described how the Trump rally looks like exactly the kind of euphoric rise that is typically seen before a major stock market crash -- rapid rate of rise fueled by emotions (joy/relief among Trump supporters), premised only on speculative hopes (a Trump plan that faces numerous obstacles before becoming reality) while having no basis in economic improvements or corporate earnings, stocks already being at a very heady CAPE (Cyclicly Adjusted Price-Earnings) ratio, the economy statistically overdue for a recession, and the fact that the Dow, in particular, was grasping for an extremely high milestone of 20K. Like the irrational rallies just before major crashes in recent history, it also came with a huge increase in trading volume, meaning a lot more people were suddenly jumping in to trade. A record-setting rally in the face of all that has "irrational exuberance" written all over it.
But the one thing that made the Trump rally fit the irrational exuberance that precedes a major stock market crash more than any other factor was the fact that almost no one was predicting this bull run would end. (At first; a few are now.) Consumer confidence hit an all-time high, too. So, optimism suddenly burst like fireworks everywhere but it's all in the same old muddy economy. Nothing has actually changed yet. Obama is even still president.
When the stock market soars with no evidence of fear, that's when it is most vulnerable to a crash because markets only crash big when almost no one sees the crash coming. (If they saw it coming, they wouldn't be running up the slope like lemmings in lock step.) The absence of fear creates surprise when the market turns, and surprise can easily become panic. It's a manic-depressive kind of cycle.
One other thing I pointed out in that article was that pushing up to or even through a major milestone along any index doesn't mean anything bullish. Many times in history, the market has fainted as it neared a major milestone and settled back down, not to reach toward that milestone again for many years. When the market has passed a milestone, it has sometimes continued a month or two and then crashed. Sometimes it keeps climbing.
So, the stock market could well faint away before it hits 20,000, not to return to such heights for years to come (as has happened many times), or it could gather up some more steam and push right past -- making everyone think the bull is charging on -- only to get dizzy in the new rarified atmosphere and fall dead away. Although there are many reasons laid out here for thinking the stock market will come down in January, I have only one reason for thinking it will. Ironically, that is Trump's own plan, which caused it to soar in the first place.
If there is one thing that holds true for rapid rallies, it's the huge desire to sell the top and realize some profit from the easy-money gains of recent weeks. The market has clearly rounded off from its rise and even slipped downward like a roller coaster cresting the first big hill. So, there is a hint that investors are about to do some profit taking, but a hint in the form of the market catching its breath doesn't bear a conclusion by itself, especially this time of year. The market always tends to cool from Christmas week through the New Year as people disengage and go spend time with families and on vacations. Tomorrow the investors get back to "work."
And tomorrow (Tuesday, January 3, 2017) means everything. One very important thing changes for the market on Tuesday morning: We enter the trading year in which Donald Trump promises a maximum capital-gains tax cut on short-term investments. (Taxes on assets like stocks held less than a year.) That's the kind of holdings a big speculative trader is going to have. If you were a big speculative trader who benefited hugely from buying stocks during the Trump rally, would you sell some of your stocks in late December to pocket the profit, or would you wait a few days so that you could realize an instant and rather substantial tax savings, too? I don't think I need to answer that for you.
So, ironically Trump's infrastructure spending plan caused the rally before the plan has even been presented to congress, but Trump's tax plan could be the rally's undoing before that plan is sent to congress.
Other factors that could let the hot air out of the Trump stock market rally
- Any benefit from infrastructure spending is far down the road because of how long it takes to plan and approve projects.
- Trump and his cabinet members have already started backing away from the infrastructure stimulus plan, saying it will not happen until the end of his term. It is not their top priority.
- We already saw Obama's "shovel-ready" plan fail to gain any enthusiasm among municipalities, counties and states and the federal government, so it failed.
- It's time to get real. You can promise anything, but then there is congress. Trump has lined up a solid wall of enemies among the Democrats, but he also faces many Republican defectors who openly stated they would not only vote with the Dems in the election but would vote for one of the worst Democratic candidates ever fielded, rather than vote for Trump. Do you think these Pubs would be so brazen about voting with the Dems for Hillary and then hesitate to side with them on the house or senate floors? Getting a majority may be hard for Trump may be hard, and he doesn't have a solid mandate because he lost the popular vote by a large amount.
- In the very least, the reality that gets approved in congress is always a compromise from the promise.
- The plan is so big, were it to happen, it would drive up the cost of its own financing like a forest fire creates its own wind. That means it will drive up the cost of the entire existing national debt, which has to be regularly refinanced. And that means the real cost in interest for the government will be astronomical because of what the federal government will have to pay on the entire debt, not just on the plan
- President Obama's scorched-earth policies seem intent upon creating as much global chaos as he can before Trump takes over.
Will the stock market crash in 2017?
That it will slump in January, I'm fairly sure -- not certain but fairly sure. I am not certain that will be an immediate plunge on Tuesday, but I think profit taking and numerous other concerns will take over before the inauguration.
As I say, Obama is doing so many chaotic things right now that he looks like he's losing his mind in a temper tantrum. Protests may become riots leading up to and especially during the inauguration as desperate people continue to do everything they can to thwart Trump's election. The entire world is descending into chaos due to outlandish immigration polices, old wars and new wars and, in the US, due to rage over Trump's victory. All of these things will make the market uneasy as they grow in intensity, which they appear likely to do.
Trump, on the other hand, has promised massive tax changes, which will certainly move money all over the place, particularly back into the US. A lot of that may go into stocks, especially repatriated corporate savings and anticipated corporate income-tax savings. (Where there are people selling to take profits there have to be buyers, so selling doesn't necessarily drive the price of stocks down; if there are enough new buyers jumping in to take up the offerings.)
All this movement of money will increase the velocity of money in many directions and should heat up the economy as intended, but increasing the velocity of trillions of fiat dollars that have been parked in stocks and bonds for years is a kind of event we've never seen. Some say it will create huge inflation as it moves that money into the Main-Street economy. On the other hand, the wipe out of stocks and bonds if the bond market crashes first could evaporate so much fiat money back out of the monetary system that we see hyper deflation.
So, I think a stock market slump at the start of the year is fairly sure because some profit taking is bound to happen, and many investors are likely to take pause with so much happening to wait and see how Trump's plans start to shape up in congress before running things up any higher. This market may slouch toward its fall. A 2017 stock market crash (maybe at the start of the year but probably not) seems likely because the stock market enters 2017 looking like a jinga puzzle balancing on one stick at the bottom of the stack; but Trump is also standing over it like a levitating magician with invisible strings of hope descending from his fingers to hold the pieces up; and a lot of other falling things like bonds may choose stocks as their last resort.
So, I have no idea how so many major countervailing forces will play out in the short term; i.e., which will hit first or hardest. What I am sure of is one very chaotic year that makes 2016 look like an opening act because the forces that oppose Trump are not going to retreat, and similar anti-establishment forces in other countries aren't going to either. In the US, the forces opposed to Trump are greater in size (raw vote count) than the forces that put him in power, so they are also not going to retreat. When the winning side has the least actual supporters, you can probably expect a pretty fierce and weird battle from the opposition.
It would take a miracle from a power higher than Donald Trump to keep all of that from breaking up, and God hasn't told me if he's going to intervene. What I see is spreading chaos throughout the world with no one who can pull it together. I was certainly right about growing chaos last year, and this year looks as though the global breakup will continue to spread like fracture lines on a frozen pond under the weight of a fighting crowd. The US stock market is only one of those lines while more and more crowds are coming onto the ice to enter the fray. The ice could break up cataclysmically as the weight increases all over the pond and plunge everyone into the ice water, or it may only break here and there, a few at a time. The only certain thing is growing chaos.
If you have to be out on the ice, stand near the shore, and bring ropes.