A Fly in the Economic Ointment?

Global Growth Cap
Repeating History
Flying Blind at 20X
China Chills
Sonoma and San Diego

The holidays are fading from memory, and 2018 is off to a good start, economically speaking. Most of the forecasts I’ve read expect a good year – not a blockbuster year or a horrendous one, but a mild pickup that ought to satisfy investors. Even the bears seem less confident than usual.

The stock market is off to a rip-roaring start. For the first time ever, the Dow Jones Industrial Average has spent an entire quarter above its upper Bollinger band. That is, it’s more than two standard deviations above its 21-day moving average. You can click on the link for more detail. This might be a little technical for some of you, but it does demonstrate that there’s a great deal of exuberance in the market.

Tony Sagami

Further, Howard Silverblatt at S&P just came out with his forecasted earnings for 2018 (hat tip Ed Easterling for sending this to me). He revised 2017 earnings down by a few dollars to $110 as S&P analysts realized that companies are going to have to take write-downs for their deferred tax losses. But oh my is Howard positive about 2018. Look at this table straight from the S&P site. Focus on the reported earnings highlighted in yellow. Howard is expecting earnings to grow from $110 to $138 in 2018. That $28 jump in earnings represents about 25% earnings growth. If it actually materializes, the S&P 500 is going to be on a royal tear upwards.

Standard & Poors

The contrarian part of me wants to scream, “Aha! No one expects catastrophe, so that’s exactly what we’ll get.” While I don’t completely rule out anything, I’ve lived through several recessions and bear markets. This just doesn’t feel like another one. I can certainly see a correction in the markets as a possibility, but without a recession we would have a V-shaped recovery, somewhat like 1987’s or 1998’s. Annoying, but not portfolio-threatening.

In my own forecast (see “Economy on a Roll” if you missed it), I characterized today’s economy in terms of Newton’s first law of motion: An object in motion stays in motion until something interferes. I said the force most likely to change this economy’s course would be an overly hawkish Federal Reserve. However, we won’t know the Fed is too hawkish until we start seeing its policies depressing growth in some way. And remember, Fed policy generally acts with at least an 18-month lag time, so we would see the real effects in 2019. So where might we encounter an exogenous (outside) force? Today I have a possible answer, and it’s one we’ve met before.

Before we get to it, I want to share with you a short video message on my upcoming 2018 Strategic Investment Conference. Many of the people I have featured in my weekly Outside the Box letter will be presenting at SIC 2018, including Lacy Hunt, David Rosenberg, Louis Gave, and Niall Ferguson. Jeffrey Gundlach, and Mark Yusko are just two of the other luminaries will be sharing their latest insights with attendees at SIC.

I just finalized two of the panels yesterday, and I’m excited about them. The first one will be on the social fabric of the US and where the country is headed. It will feature three distinguished guests: Neil Howe, author of The Fourth Turning; Democratic political pollster Patrick Caddell; and the Heritage Foundation’s Steve Moore. In the run-up to the 2016 election Pat Caddell identified the angst among voters before any other pollster did. But rather than reexamine what happened in 2016, were going to be talking about 2018, 2020, 2024, and 2028. There are trends among the Millennials that have far-reaching implications.

The second panel will focus on cryptocurrencies and will feature John Burbank (who just set up a cryptocurrency fund) and George Gilder, a cryptocurrency fan and a man who has been at the forefront of every technological revolution for the past 30 years. Our own Jared Dillian, who is somewhat of a Bitcoin skeptic, will be moderating the panel. We are finalizing the third panelist.

I really hope you can make it to SIC 2018, held March 6–9 at the Manchester Hyatt in San Diego. It’s going to be a high-octane, intellectually thrilling three days. Here’s my video invitation: