February 28, 2017

BBT-perspectives-market-spotlight-february-2017-feature

In this edition of Market Spotlight by BB&T Wealth, we discuss how U.S. stocks have already reached many year-end target levels. Today, we broadly discuss what is behind the recent rally and what signals to look for in tonight’s speech by President Trump.

Each year Barron’s publishes a year-end issue asking prominent Wall Street strategists to dust off their crystal balls to forecast the next year’s S&P 500 closing price. The Dec. 17, 2016, issue surveyed 10 Wall Street strategists who forecasted an average 6.3 percent return for 2017. The firms, their forecasts and average YTD results are shown in this chart.

BBT-perspectives-market-spotlight-february-2017-barons

As evidenced by the green shaded area, the forecast average was 6.3 percent and through Feb. 27 the actual S&P 500 total return was 6.21 percent. Not bad given it only took two months to get there. The Bespoke Investment Group conducts a similar analysis each year tabulating calendar-year forecasts for S&P 500 returns. An historical look at Wall Street’s forecasting track record for 2000-2016 reveals the following:

  • In 17 years there have been just five negative returns for the S&P 500. None were forecast.
  • The most accurate forecast was in 2005 missing by only .2 percent.
  • The biggest miss was in 2008 missing by 49.6 percent.
  • The 17-year average forecast missed by 5.4 percent.

Takeaway:

Year-to-date the U.S. market has already reached many strategists’ year-end targets. This is in part due to a modestly improving economy and an end to the earnings recession. But, the primary thrust behind this market has been raw animal spirit optimism. We prefer to rely on the facts and are hopeful that tonight’s speech by President Trump will give us a glimpse of tax reform details and timelines. Forecasting is best left to The Weather Channel.

The Trump Speech:

President Trump makes his first speech before a joint session of Congress at 9 this evening, Feb. 28. This is a pivotal speech and markets will be watching intently. Investor sentiment (optimism) remains high. Markets will be searching for tangible fiscal policy details and hoping for timing that is sooner rather than later.

Animal spirits (optimism) have been the primary fuel behind this extended 90-day bull thrust, but we need to remember animal spirits can move either side of the scale. Optimism can fade or even become pessimism if markets become impatient in their quest for tax reform.

We need to hear hard facts sooner rather than later. If we do, the market may respond more favorably. If we don’t, the market may be due for a pause. Neither case should cause investors to deviate from their long-term investment plans as corporate tax reform is highly likely and positive for stocks. The longer investors have to wait for policy details to emerge, the greater the uncertainty. Higher uncertainty equates with potentially more volatile markets than we have seen since last summer’s Brexit event in the U.K.

Treasury Secretary Mnuchin and President Trump both signaled last week that action to repeal/replace Obamacare will need to be resolved before taking up tax reform. If resolving the future of Obamacare extends the timeline for tax reform past August or even into 2018, the markets will be disappointed.

Bottom Line:

The U.S. economy and corporate earnings began to turn positive even before the election so there is support behind the S&P 500 rapid move to its year-end forecasts. Deregulation efforts have enhanced this support. Expectations for broad tax reform have fueled investor optimism. Concrete fiscal policy and timing details offered in tonight’s speech will be cheered by investors and potentially chart the course toward the top end of the forecast range seen in the chart above. A vague message with an open-ended time frame for implementation could nudge markets toward the lower end of the forecast range in the chart above. We remain cautious optimists and encourage folks to stay the course and stay invested.

We will extend our more detailed outlook on the economy and markets next Monday, March 6th, in our Market Monthly series.

February 28, 2017

BBT-perspectives-market-spotlight-february-2017-feature

In this edition of Market Spotlight by BB&T Wealth, we discuss how U.S. stocks have already reached many year-end target levels. Today, we broadly discuss what is behind the recent rally and what signals to look for in tonight’s speech by President Trump.

Each year Barron’s publishes a year-end issue asking prominent Wall Street strategists to dust off their crystal balls to forecast the next year’s S&P 500 closing price. The Dec. 17, 2016, issue surveyed 10 Wall Street strategists who forecasted an average 6.3 percent return for 2017. The firms, their forecasts and average YTD results are shown in this chart.

BBT-perspectives-market-spotlight-february-2017-barons

As evidenced by the green shaded area, the forecast average was 6.3 percent and through Feb. 27 the actual S&P 500 total return was 6.21 percent. Not bad given it only took two months to get there. The Bespoke Investment Group conducts a similar analysis each year tabulating calendar-year forecasts for S&P 500 returns. An historical look at Wall Street’s forecasting track record for 2000-2016 reveals the following:

  • In 17 years there have been just five negative returns for the S&P 500. None were forecast.
  • The most accurate forecast was in 2005 missing by only .2 percent.
  • The biggest miss was in 2008 missing by 49.6 percent.
  • The 17-year average forecast missed by 5.4 percent.
Takeaway:

Year-to-date the U.S. market has already reached many strategists’ year-end targets. This is in part due to a modestly improving economy and an end to the earnings recession. But, the primary thrust behind this market has been raw animal spirit optimism. We prefer to rely on the facts and are hopeful that tonight’s speech by President Trump will give us a glimpse of tax reform details and timelines. Forecasting is best left to The Weather Channel.

The Trump Speech:

President Trump makes his first speech before a joint session of Congress at 9 this evening, Feb. 28. This is a pivotal speech and markets will be watching intently. Investor sentiment (optimism) remains high. Markets will be searching for tangible fiscal policy details and hoping for timing that is sooner rather than later.

Animal spirits (optimism) have been the primary fuel behind this extended 90-day bull thrust, but we need to remember animal spirits can move either side of the scale. Optimism can fade or even become pessimism if markets become impatient in their quest for tax reform.

We need to hear hard facts sooner rather than later. If we do, the market may respond more favorably. If we don’t, the market may be due for a pause. Neither case should cause investors to deviate from their long-term investment plans as corporate tax reform is highly likely and positive for stocks. The longer investors have to wait for policy details to emerge, the greater the uncertainty. Higher uncertainty equates with potentially more volatile markets than we have seen since last summer’s Brexit event in the U.K.

Treasury Secretary Mnuchin and President Trump both signaled last week that action to repeal/replace Obamacare will need to be resolved before taking up tax reform. If resolving the future of Obamacare extends the timeline for tax reform past August or even into 2018, the markets will be disappointed.

Bottom Line:

The U.S. economy and corporate earnings began to turn positive even before the election so there is support behind the S&P 500 rapid move to its year-end forecasts. Deregulation efforts have enhanced this support. Expectations for broad tax reform have fueled investor optimism. Concrete fiscal policy and timing details offered in tonight’s speech will be cheered by investors and potentially chart the course toward the top end of the forecast range seen in the chart above. A vague message with an open-ended time frame for implementation could nudge markets toward the lower end of the forecast range in the chart above. We remain cautious optimists and encourage folks to stay the course and stay invested.

We will extend our more detailed outlook on the economy and markets next Monday, March 6th, in our Market Monthly series.

Sources: Sources: Strategas Research Partners, Evercore ISI, FactSet, Barron’s, CNBC.com

This piece is produced by BB&T’s Wealth Portfolio Management Team.

The information set forth herein was obtained from sources, which we believe reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities. Diversifying investments does not ensure against market loss and asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. Past performance does not guarantee future results.