Placing my bets for 2017

Everyone knows, or should know, that betting is not smart. What smart investors do is forget about what might happen and prepare themselves for whatever may occur, through diversification, reasoned asset allocation and, well, patience.

That’s the smart way. But the fact is, real investors in the real world often don’t do that. Let’s admit it: for all the numbers-crunching and analysis, there’s still an element of instinct, of gut — and, ultimately, of betting — in every decision. For better or for worse.

Well, since it’s the silly season for market outlooks, I’m going to make a few predictions for 2017 — straight from the gut, more or less, and absolutely unguaranteed to actually occur.

The first prediction is that the Trump Rally will lose steam by May. Or earlier, but I’m hedging my bets.

I doubt many folks foresaw on Nov. 9 just how durable the animal spirits of U.S. investors, or their faith in president-elect Donald Trump to get things done, would prove to be. Yet still the Dow has been approaching the 20,000 mark, with no clear signs of abating.

For what it’s worth, I’m guessing that the current rally will end not with a bang, but with a whimper — the kind of whimper that the U.S. legislative system seems to be quite good at. After all, a lot has to happen for Trump to get his budget ideas through the congressional process intact, and at every step we can reasonably expect some diminution, complication and delay.

The devil is in the details. The president is supposed to present his budget proposal to Congress by the first week of February, but it’s usually later, especially when there’s a new administration. Then Congress holds hearings and comes up with its own budget resolution, which it’s supposed to pass (by simple majority) by April 15, but it often takes longer, and sometimes it doesn’t pass the resolution at all. When that happens, the House of Representatives and the Senate develop their own resolutions, which then…

Oh, never mind. The point is that with so many checks and balances in the congressional process, the new president’s budget ideas are practically bound to be challenged and watered-down and horse-traded before they get enacted. I suspect that given the tensions within Trump’s own cabinet and with Republican budget hawks in Congress, this will take a while, and market optimists will end up at least slightly disappointed.

Expecting the bloom to come off the market rose by late spring doesn’t seem unreasonable to me.

My second prediction is that the Fed will be a paper hawk in 2017. Again. Janet Yellen and her confreres at the U.S. Federal Reserve surprised no one by raising the target rate this month, but did throw a monkey wrench into market expectations by suggesting they were forecasting three more rate hikes next year.

It could happen, of course. But let’s remember last December, when the Fed hiked for the first time in years, it anticipated three or four more increases the next year. We know what happened: nothing, at least until a year later. If fiscal stimulus disappoints — or something else happens to delay or derail stronger growth — then we can expect the Fed’s actions to belie its hawkish tone once again.

A third guess is that China will rebound. 2016 has been crummy for Chinese stocks. The Shanghai composite is down more than 12 per cent, the smaller-cap Shenzhen exchange by more than 14. As the U.S. dollar has surged, the devaluation of the yuan and the corresponding flight of capital from China has intensified. Economic growth has slowed, and Beijing has been more focused on regulatory reform and anti-corruption than on stimulative policies.

But I think this could turn around in 2017, and not just because my gut tells me that what goes down must come up. For China, few expect a hard landing next year, and the administration of President Xi Jinping, for all its reformist agenda, has shown it will take extraordinary steps to pump up growth. In the real economy, there are some marginal signs of strengthening, as well (for instance, industrial production profits actually in November).

So I’m guessing there will more stimulus — plenty of it — in 2017. Politically, a leadership change is coming up late next year, and much will depend on the legacy factor for Xi, who, by the way, gets to name his own successor. Will he want to go out as a hard-line reformer, or as the man who returned China to the path to prosperity? My gut says the latter.

My final prediction is that Canada will be a good place in invest in 2017.

Granted, it already is. The TSX was one of the best-performing markets in the world in 2016. And that shouldn’t change much next year. The economy might stink, and the Bank of Canada might (ineffectively) lower rates again, but I wouldn’t expect that to derail equities.

How come? Oil prices seem to have found a floor, and reflationary expectations from the U.S. will drive effective (if not official central bank) interest rates higher. That’s good news for the two sectors that are overrepresented on Canada’s big board: energy and financials.

Of course, to paraphrase the famous prospectus line, newspaper columnist predictions are not indicative of future market results. In fact, they are absolutely no substitute for sound financial advice, smart asset allocation and portfolio diversification.

But hey, where’s the fun in that?