"Predicting rain doesn't count. Building arks does."
-- Warren Buffett
This is the time of the year when market pundits roll out their market predictions. Although no one is very good at it, the business media likes the easy headlines and fills up some space during the slow holiday period.
I purposely forego making major market predictions, as I believe it creates mental and psychological biases that can impact the way I manage my trades. I want to freely admit I don't know what will happen in 2017, so that I will be ready to react to whatever may develop.
Nonetheless, I do find it helpful to contemplate the major factors that are likely to drive the action in the year ahead. We can react faster and more aggressively if we are watching for the early signs of a major shift in the market.
There are three factors that are going to determine what happens to the market in the year ahead: the central banks, the business cycle and politics. Those are pretty general ideas, but we have to keep them in mind as we navigate the market action.
Central banks have been the primary factor driving this market since the Great Recession. Nothing has mattered more than low interest rates. It is now becoming clear that the days of endless accommodation are slowing. We still have bankers in Asia and Europe pressing to keep rates lower, but they are running out of ammunition. In the U.S., the Fed is clearly signaling that it has started to slowly increase rates and the bond market has reacted swiftly.
The bears have always believed that it would be the central banks that ended the long running uptrend. The old saying about not fighting the Fed worked very well to the upside; now the question is whether it will work to the downside.
The other factor that will have a huge impact on the market in 2017 is the business cycle. We have experienced one of the slowest, but longest cycle recoveries over the past eight years. It has been low interest rates rather than economic growth that has driven the recovery and now we have to wonder if growth can finally accelerate to the point that has been anticipated for many years.
Barack Obama had the great fortune to be elected at the very bottom of the business cycle. There likely would have been a better economy over the past eight years simply because of the natural business cycle. We can debate whether or not his policies aided the cycle or hurt it, but there is no question that the cyclical nature of economics drove the action and now we are at a late point in the cycle.
That brings us to politics. Many pundits believe that the presidency of Donald Trump will be the most important factor driving the market in 2017. While the Trump administration has the ability to prolong the positive business cycle, there is much that is not under its control. Tax and trade policies will have some impact, but the business cycle and monetary issues are far more powerful.
While I'm optimistic about a better business and economic environment under President Trump, I'm concerned that the business cycle and the lack of support from central banks will keep the market contained.
As always, there will be great market opportunities. We really don't need to know where the indices will be, a year from now. We need to recognize that there will be some major themes and trends during the year, and if we embrace them in a timely manner we will do well.
We are kicking off the last day of the year with a positive start, but extremely thin trading caused some unusual action in currencies overnight and the likelihood is that we will have some random action today.
