INSIGHTS

On January 11, 2017

Outlook for 2017

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DJIA: 19,963.80 (as of 1/6/2017)



1. The DJIA could reach 22,000 in 2017 before a greater-than-10% retreat unfolds. Although the stock market surged higher following the November elections, it is not seriously overbought as the New Year begins. Sidelined investors awaiting a big pullback may finally realize they are missing the rally, scramble into the market and spur urgent buying. This could accelerate upward momentum, catapulting the market 10% higher before a substantial correction unfolds.



2. Inflation will be back in the lexicons of Wall Street analysts and media pundits. In February 2016, the market’s focus shifted from recession to inflation. Oil, metals, materials and other commodities engaged in recovery trends as other traditional cyclicals also made considerable strides in relative strength behavior. It should become increasingly evident this year that central banks globally were successful in re-inflating their economies. The Fed will eventually react to inflation but it may be hesitant to adopt a hawkish policy anytime soon, awaiting more consistent signs of economic growth. Moderately checked inflation should place heightened focus on earnings leveraged opportunities.



3. “Time in the market” environment could be a good strategy in 2017. Last year produced what may eventually prove a formidable technical platform for launching a more pronounced advance to record levels. The proliferation of “cup-and-handle” price patterns imply elasticity and longevity while also offering little evidence of speculative buying. We believe these historically bullish chart patterns should continue to produce a resilient market tone amid abrupt and sharp retreats similar to those that have occurred prior in this cycle, including the January 2016 selling rout. These short-lived retreats have effectively reined in near-term excesses, keeping speculation in check while maintaining balanced performances among the market’s core leaders. Awaiting a big correction could leave would-be investors on the platform as the train leaves the station. Similarly, it may be advisable to resist the temptation to sell amid near-term volatility.



4. Healthcare may be down, but it is not out. Some of 2015’s lagging themes proved last year’s leaders. Some examples: BRIC (Brazil, Russia, India & China), Energy, Materials. Healthcare ended 2016 in the performance basement, but bottoming patterns in many of its subcategories could be signaling a revival that finds this out-of-favor sector regaining its leadership stature. Clarity about the outlook for Obamacare – repeal and replace or modify and amend – could go a long way in restoring renewed buying interest in this group. Biotechnology, clinical and laboratory testing, health care providers and medical devices exhibited improving relative strength in late 2016. 



5. West Texas Intermediate (WTI) crude oil could advance above $60 in 2017. WTI more than doubled from its lows in 2016. Its advance has been punctuated by regular backing and filling that has secured support at incrementally higher levels. While the price of oil has been affected by OPEC (Organization of the Petroleum Exporting Countries), currency valuations and geopolitical events, I believe its basic trend serves as a barometer of investors’ perceptions about global economic expansion. 



6. The risk/reward ratio for consumer staples might be attractive for those with a total return investment goal. Consumer staples, traditionally a defensive growth category, was left behind in the fourth quarter rally. While the market is moving toward a growth focus, food and beverage-related stocks are very oversold on a relative basis. This category currently sports a number of stocks with attractive yields and potential for good longer-term uptrends.



7. I am raising my longer-term, end-of-cycle DJIA target to 25,000 from 23,500. We believe the rally that followed the election outcome is more than a knee-jerk reaction following the resolution of nagging political uncertainties. It may also have served as the cyclical timeline for an accelerated buying phase that often accompanies the late innings of a bull market. Further, the rally may underscore investors’ optimism regarding upside potential when years of monetary accommodation are melded with fiscal and economic reforms that reduce tax burdens and strip out unnecessary regulations. Smooth sailing? Not necessarily. But, with consumer confidence on the rise, improving investor confidence should naturally follow. 



8. Watch for contracting sector leadership by late this year. I believe we are in the “top of the eighth inning” in this market cycle. Now, to put this into perspective, the “first pitch” was thrown back in 2002. So, from a timeline standpoint, there could be several years remaining in “regulation play.” The point is, I believe historical late-cycle features will become increasingly manifest in the coming year. One such feature could be illuminated buying in inflation-related sectors including industrials, materials, metals and railroads. Sectors such as consumer discretionary, healthcare, media/entertainment and technology also have the potential to perform well. American-made manufacture and ingenuity may be back in vogue on Main Street and in sharp focus on Wall Street.





CRN: 2017-0109-5727R



Opinions in this piece are those of Peroni Portfolio Advisors and are not necessarily that of AAM. 



This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com.