Why I’m Optimistic About the Market in 2017 – and Why You Should Join Me

8 | By Wall Street Insights and Indictments Staff

Last week, in my Market Outlook for 2017, I summed up my expectations for the New Year by saying, “My outlook for 2017 is very positive.”

In the comments section at the end of the Outlook, reader James commented:

“It is going to be a year of turmoil. One shock after another. And you end up, “My outlook for 2017 is very positive …”Oh my! For me, it is: “BE PREPARED … for the worst!”

I agree with being prepared for the worst, because there are hurdles, sinkholes, and black swans out there. However there’s one gigantic market reason and three “Trump card” reasons why I’m optimistic about 2017 and beyond.

When I say gigantic, I mean the market can easily double, in a matter of years, not decades.

The reason is simple. But it’s not mainstream news, and only a few analysts realize what’s happening – which is why hardly anyone knows the truth about it.

Here are my simple, overlooked reasons that have me hopeful for the coming year…

Cheap Money and Shrinking Markets

The truth is U.S. markets are shrinking, fast. And starting any day, the speed at which they’re shrinking is about to accelerate.

It’s simple: more capital chasing fewer and fewer shares will drive markets higher and higher.

Here’s the math and reasons why U.S. stock markets are shrinking.

Because the economy hasn’t been growing robustly, corporations aren’t incurring capital expenditures to build plants, buy equipment and hire workers to grow their producing capacity.

Instead of spending on capex, they’re buying back their own shares and shrinking the number of shares in the marketplace.

And because the economy hasn’t been growing while we’ve been battling deflation, the Federal Reserve’s been keeping interest rates near zero.

That’s made it easy for corporations generating profits, as well as corporations with declining earnings, to borrow cheaply in order to buy back their shares.

2015 saw a record $572 billion worth of shares buybacks by U.S. corporations. The total for 2016 won’t be far behind that when it’s tallied sometime this January. According to S&P Dow Jones Indices from 2009 through September 2016, companies bought back just over $3.24 trillion worth of their outstanding stock.

Cheap money and the ability to borrow for next to nothing in the bond market also fuels mergers and acquisitions activity, shrinking the amount of stock available to investors.

Since 2000 there are actually one-third fewer companies traded on U.S. stock markets.

Not only are buybacks, mergers and acquisitions (M&A’s) shrinking the number of shares and companies available to invest in… IPOs are virtually non-existent.

From 1980-2000, an average of 311 companies came to market annually. In 2015, only 170 new companies made it onto a U.S. exchange, down 38% from 2014. In 2016, that number fell 35%, meaning only 111 companies debuted last year.

Meanwhile, U.S. GDP in 2000 was $10.28 trillion and, in 2016, it’s estimated to be $18.56 trillion (an 80% increase).

The Federal Reserve alone created nearly $4 trillion worth of “new money” since the credit crisis. That’s on top of capital generated by stock market gains, corporate profits, and capital creation devices like leverage.

More capital chasing fewer shares, more demand and less supply… This will push markets a lot higher.

That alone is gigantic – and the principal reason I’m optimistic markets are capable of doubling within a matter of years.

The Three Trump Cards

On top of that fundamental truth, there are three “Trump cards” about to be played that will accelerate the availability of capital and simultaneously accelerate the volume of share buybacks.

  1. The Donald’s first card trick could be a tax cut.

A tax cut – whether it’s a personal tax rate cut, a corporate tax rate cut, or more likely both – will generate more capital. More capital in the hands of corporations will mean more buybacks. More capital in the hands of private investors will find its way into rising U.S. stock markets.

  1. The Donald’s second card trick will likely be a tax break on repatriated corporate cash.

Estimates of how much actual cash and cash equivalents U.S. corporations have parked overseas ranges from $1-$2 trillion. Any meaningful tax holiday to lure that cash back here would see a massive amount going right into share buyback programs.

  1. The third card The Donald has to play is deregulation.

Smart deregulatory reforms could free up capital across the economy, which would immediately go looking for a place where it can grow. First and foremost, it would go into U.S. stocks.

If after he’s inaugurated Donald Trump wants to make a dramatic entrance, he’s got those three cards to play. The American people have made it clear they would like to see these in action, and Congress would be hard pressed not to let them be parlayed.

Those are the principal reasons I’m optimistic about 2017 and beyond.

However, there are other players around the world and here in the U.S. with their own hands to play, and some of their cards are ugly.

While optimism is warranted, so is caution, because we’re not “there” yet. Once again, in-between here and there are hurdles, sinkholes and black swans.

I’ll address them on Friday.



8 Responses to Why I’m Optimistic About the Market in 2017 – and Why You Should Join Me

  1. David Bird says:

    Novice here but want to purchase stocks.
    Explain in detail how to go about purchasing tjese stocks. A S A P

  2. Stu says:

    Good commentary Shah — your forecast sounds bullish, maybe too bullish in the next little while. We’re near 20k on the Dow and a tab under 20tr in debt (good round #s for correction?). And look at the huge ratio gap between the 10-yr and s&p. I too think a Trump Presidency will be great for our markets, but I think we have to go quite a bit lower first. That’s why I moved back into gold/silver stocks last week. Jmvho. Best regards.

  3. Noah Katz says:

    Hi Shah,

    You may well be right, but my “yes but” brain raises these points:

    1) Yes, the Fed “printed” a lot of money, but my understanding is that one of the reasons it was so ineffective is that most of it ended up in bank reserves, and the banks didn’t want to lend it.

    2) The main impetus of buybacks, i.e. the QE money that did get out there, has ceased, and interest rates are on the rise

    3) Take a look at Doug Kass’ “15 Surprises for 2017” for the many ways that things can go very wrong with Trump at the helm:

    • Malcolm says:

      Agree Noah with respect to banks but also recall that they are required to have so much more cash on hand so they don’t get into the boondoggle they did in 2008. If those laws are repealed (very likely) then Banks have whole lot more cash to lend.

  4. John Snyder says:

    You’ve got a primary reason for stock market expansion correct–up until now, that is. Yes, there’s been a lot of easy, addictive credit, and corporations have binged on borrowing and share buybacks. But did we miss the Fed raising rates in December, and promising more of the same for 2017? Corporations have already maxed out on borrowing, and the slightest rise of interest rates sounds the death knell for any more such buyback activity. They probably won’t be able to service what they’ve already got. To expect a continuation of what we’ve seen is fantasy. True, the Fed tends to blow hot air on their rates usually, but in this case they’ve got an incoming president with a real strained relationship with Yellen. A contracting market and struggling economy just as his term is getting started would please the liberals on the Fed. Also the Trump cards–yeah, that requires Congressional action, and I’m not so optimistic about that either. I think the government will be dysfunctional for some time.

  5. James says:

    Wow Shah, what a surprise! It is quite a compliment to be quoted in your column.

    I am looking forward to your Friday article giving us readers further insight to your views on what to expect in 2017. Your thoughts are appreciated, whether we agree or disagree. One thing you do is broaden our minds. I learn when reading your articles because you explain concisely and with clarity how things are the way they are from a historical perspective. You learn from the past and you do a great job explaining it..

    The future is anybody’s guess. My guess is 2017 will be a very volatile year, and as investors, we should prepare ourselves for it. There will be fantastic opportunities to make big gains in a very chaotic market by playing it defensively. Huh?

  6. Leslie says:

    From Raymond Lo. His predictions last year were good. “As such, yin fire year often boost peoples confidence about the economy bringing good performance to the stock market. Particularly during the spring and summer seasons when the wood and fire seasonal element will make the candle burn very bright and such illusory fire will drive up the stock market sky high. However, once the seasonal support of wood and fire expires in around August onward, there will be dramatic downturn as the illusive candle flame is dying. Hence for people play in shares and stock market have to prepare for big disappointment in the second half of the year. Such phenomenon of crazy market in first half year and collapse in autumn happened in many previous yin fire years before, such as 1987, 1997, 2007.. The bearish market may commence from around August 2017 and this time the impact can be long lasting as there will not be any support to fire element between 2018 to 2022.”

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