Bearish stock forecasts are bull
2018 predictions are wrong, Ken Fisher says
Most folks think stocks in 2017 were gangbusters and can’t be so strong in
2018. Professional forecasters, too, foresee ho-hum returns. But they’re wrong. Expect more from our current bull market. The crowd’s low expectations are one good reason.
Unless something unusual kills bull markets prematurely, sentiment regularly follows the path laid out by the legendary Sir John Templeton: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” The optimism-euphoria shift comes during the bull’s final one-third, usually bringing outsize returns. Years like 1997–99, 1989 and 1980 were final-third giants.
Nine years into this bull, we still haven’t seen the typical late-stage huge returns. U.S. returns of 22% (through Christmas) dwarf recent years, but they aren’t last-third-large. It’s almost exactly average for a bull market. Since its inception, the average returns for the Standard & Poor’s 500 in bull-market years is 21.5%. Last-third years have an even higher average, but few people fathom their bigness — particularly now. And that’s actually bullish, because sentiment and optimism have room to grow if the market follows Templeton’s normal progression.
Twenty-plus years ago, I first detailed why, for complicated financialtheory reasons, professional forecasters’ consensus views of the market are consistently, vastly wrong — one year out.
Calculate their average forecast, then expect something else — either much higher or lower. Last January, the professionals’ average forecast for U.S. stocks was just 5%. It turned out to be way too low.
They’re even more ho-hum now —
4.3% for 2018. Sure, a nasty down-year might happen. But with global econo- mies accelerating together and political risk gridlocked everywhere, a big downer is unlikely. Current common fears are false factors as discussed in several of my columns. False fears are always bullish. They depress prices now — like a compressed spring.
A typical, final-third 20%+ year also fits the model. And that’s much more likely. Why? Because it’s normal yet unexpected.
European stocks should continue outpacing America’s. Political uncertainty over there will fade further as Germany forms a government, Italy’s elections experience more gridlock and Brexit bogs down in boredom.
Consider this as well: European lend- ing exceeds ours. They’re also at an earlier stage of Templeton’s progression.
Then comes currency. In euros, 2017 global returns were even smaller, less than half those in dollars. So Europeans still feel frustrated by below-average returns. Their sentiment is more subdued than ours. That means more upside potential there.
The same overweights that worked recently should continue, including tech, health care, European banks and huge, high-quality, multinational consumer brands. Underweight or skip energy and materials — the supply gluts there will continue unabated.
And bonds? Consensus views are almost always wrong. Most pundits argue long-term interest rates will rise, hurting bond prices. (Interest rates and bond prices sit on a seesaw.) Their logic: The Fed’s upcoming short-term rate hikes will push long-term rates higher.
But interest rates don’t work like that. The market determines long-term rates, not the Fed. The biggest driver is inflation. When inflation expectations dampen, lenders require less interest payment to compensate for long-term inflation risk, and long-term rates languish. Fed short-term rate hikes are anti-inflationary. So as they hike and inflation expectations fall, long-term rates will surprise on the low side. The more the Fed hikes, the more benign bonds will become.
Great as I expect 2018 to be, markets don’t move in straight lines. The relative calm of 2017 was unusual. It wouldn’t surprise me to see one or more 10%-15% declines in the stock market in an overall super year. If that happens, stay cool. Trying to time these “corrections” almost always results in failure. Instead, wait it out. Bull market declines come and go fast. You don’t want to miss the gains that follow.
Great as I expect 2018 to be, markets don’t move in straight lines. The relative calm of 2017 was unusual.