Investor sentiment is at all-time highs.
Market volatility, as measured by the VIX, has been scraping historic lows for the past 12 months.
Correlation between sectors and asset classes, which flashes warning signs when high, has been noticeably low. Over the last three months, correlation fell to 18% between S&P sectors; that’s close to the lowest figures on record according to research by Credit Suisse.
Economic and equity growth has been global, and all that’s just the tip of the iceberg.
To some, it could be overwhelming to look at all the potential for the coming year, but I’ve narrowed the breadth of the markets into just the sectors with the most opportunity for any investor or trader.
On Wednesday, I released Part One of my 2018 Capital Wave Forecast, which you can find right here. Now, I’m sharing the six best opportunities in four more sectors.
Here are six more plays to focus on in 2018…
Banks Flush With Capital
When CVS Health Corp. (CVS) announced its intention to buy Aetna Inc. (AET) for more than $69 billion in early December, Goldman Sachs and Barclays each committed to pony up $20 billion in cash towards bridge financing to close the deal and get in on selling bonds as part of the permanent financing the deal requires.
It used to be that only JPMorgan Chase & Co. (JPM) was big enough to plunk down $20 billion or more to facilitate a deal. With Goldman and Barclays proving there are more flush banks out there, deals and mergers like CVS announced won’t face any financing impediments in 2018.
Replacing bridge money with permanent financing is all about selling debt securities. Whether debt financing facilitates M&A deals, refinancing existing debt, expansion plans, or generating cash for buybacks, there’s a healthy appetite globally for debt securities from investment grade to junk.
Financially flush big banks have the ample resources to facilitate economic and market growth in 2018.
If you want a big bank that weathers everything it manages to foul up on its own, manages all its regulators and international regulars, and is the biggest bank in the U.S. (by assets and earnings this year)?
JPMorgan Chase & Co. (JPM) is it.
JPM knows how to make money, and it’s poised to have an excellent 2018. Interest rate hikes are fattening its net interest margins, which we’ll see more of in 2018, and loan demand and deal-making are going to ratchet up globally this year. JPM’s not going to miss a beat on any front. A trending global economy and what should prove to be a more volatile year for commodities and currencies will add to JPM’s trading profits. The stock should advance handsomely in 2018, by at least 30%.
On the small end of banking, I like little Customers Bancorp Inc. (CUBI). This little bank’s stock is cheap right now, but it’s well positioned for a pop in 2018. It generates good cash flow and is seeing its margins improve. It’s been left for dead, but there are some surprises ahead for CUBI if it makes itself more attractive in the market. I’m playing this little bank as an acquisition target. It’s cheap and would give larger Pennsylvania along with other regional banks access to its profitable markets. CUBI could easily rise 30% on its own, but much more if it’s to be acquired.
The cheap U.S. dollar has been helping domestic exporters and companies with overseas earnings.
Strong global growth has propped up foreign currencies including the Japanese yen, the Chinese yuan, the Swiss franc, and the euro. As these currencies rose in value, relative to the U.S. dollar over the past two years, exports out of the U.S. became cheaper, fueling sales and earnings gains for exporters.
At the same time, overseas earnings of U.S. companies, especially big tech companies, get a boost in earnings when sales made in foreign currencies are translated into cheaper dollars in quarterly earnings reports.
Given global growth, less reliance on petrodollars, the ascent of the euro, yen, and yuan, an undervalued U.S. dollar should continue to support exports and earnings growth in 2018.
Microsoft Corp. (MSFT)
When it comes to global growth and taking advantage of currency exchange rates, I love Microsoft. MSFT and ORCL are huge global players, and they’re only getting bigger and more profitable. MSFT’s stock is on a tear, and that’s coming from me, who has been a fan since it broke out of the mid $20s. I remember telling Stuart Varney at Fox Business Network, who owns the stock, it was going to $50 back when it hit $29. And when it got to $45, I told him I was changing my price target to $80. Well, it’s more than that now. And it’s going to keep rising; it has momentum behind its cloud business, its great new hardware products, and the enterprise software that companies around the world love. MSFT’s heading to $100, but I think it has a lot more ahead of it. In 2018, it could get to $125, or more.
Momentum as a Three-Letter Acronym
The most powerful force driving upward market momentum is more buying of the stocks and indexes that are going higher.
That’s happening at an unprecedented rate thanks to exchange-traded funds (ETFs).
Index ETFs, driving the passive index investing trend, are seeing record inflows in 2017.
Sponsors have been introducing new funds at a regular clip, with most of them holding at least some of the top performing stocks of the past 12-18 months. Those top-performing stocks have been driving benchmark indexes they’re a part of, the ETFs that hold them, and are hedge fund and institutional desk favorites.
In just the past 12-months, ending October 21, 2017, Morningstar Inc. reported investors had sold $218 billion worth of active funds and poured $273 billion into passive funds.
Index funds, index mutual funds and index ETFs, now hold 17% of all the shares of companies in the S&P 500, according to FactSet.
As long as markets, measured by benchmark indexes, continue to rise, investors will keep pouring money into index funds, fueling what looks like a perpetual momentum machine.
There are major narratives I am expecting in 2018. If the U.S. GDP expands, if wages start rising, if consumers keep spending the way they’re spending this holiday season, the tax cuts will add to everyone’s bottom line and add to the momentum the market’s enjoying.
Because of so many passive investors buying so many index funds, the market sector in 2018 that’s going to benefit most will be U.S. small-cap growth stocks.
iShares Russell 2000 Growth ETF (IWO) is the best ETF to ride that trend. IWO enjoyed a great 2017 like all the indexed ETFs. If everything goes according to the narratives, small-cap growth should lead all other benchmarks in 2018. How high IWO can go will be a function of momentum in 2018, and that means it could revolutionize your portfolio.
But it’s not just earnings growth, cheap capital, and momentum driving investor interest.
Is There Anything Standing in Our Way?
Upward momentum in U.S. equity markets has been additionally supported by improving economic conditions domestically.
The unemployment rate at 4.1%, remains steady at 17-year lows. Unexpectedly strong employment gains late in the year, coming on the heels of two devastating hurricanes, indicates further positive momentum in hiring.
Wage growth, at 2.5%, is finally showing signs of picking up.
Inflation, measured by the price consumption expenditure (PCE) deflator remains well below 2%.
Overall economic growth, as measured by GDP (gross domestic product), has been above 3% for the past two quarters and is expected to rise to 3.5% to 4% in Q4 of this year.
Positive momentum driving the economy higher should drive equities a lot higher in 2018.
My equity forecast for 2018, if all the positive momentum remain intact, is for the S&P to end the year at 3050, up 15% and I expect the Dow Jones Industrial Average to end 2018 north of 28,000.
That’s if all the momentum levers (that are being pulled to near perfection today) continue to operate in 2018.
Because there’s always something out there that can go bump in the night, and with all the good everyone expects in 2018, any little bump that surprises investors can manifest its own momentum slipstream, it makes sense to have on a macro-disruptor play.
For that, I like playing a spike in the CBOE Volatility Index (^VIX). The way to do that is by buying cheap calls on the VIX (I like the 18-20 strike price range, two to three months out. As those calls get close to expiration, I’d roll them out another couple of months and keep rolling them out as each comes close to expiration. That way if some bump turns into a black hole, you’ll at least make a ton on your VIX calls.
And lastly, I’m going on record here saying there’s something fishy going on in China. The leverage there is astounding, the banks are stuffed to the gills with non-performing loans, and the shadow banking system is darker and scarier than it’s ever been. If something gives, the whole system will shake to its core. For that reason, I’m looking into shorting the iShares China Large-Cap ETF (FXI). You might want to do the same, or at least buy some long-dated puts on FXI. Sometimes my gut is churning for a reason.
Your First Move to Prepare for the New Year
Even if markets aren’t running on all cylinders, there will be tremendous opportunities in 2018 to make outsized gains timing market reactions to potential pockets of thin air and headwinds that have been developing these late stages of economic growth and market cycles.
That’s exactly what we’ve narrowed to a science over at Zenith Trading Circle. My members are learning how to take opportunities like the ones above and turn them into profits that compound, over and over. My recommendations have incredible potential – including a play from a couple weeks ago that net 455% gains.
If you join now, you’ll be just in time to receive my first recommendation of the New Year.