2018 What’s Next?

At the end of the year we begin to formulate ideas about how the next year in investing will transpire. We build scenarios and that helps us invest accordingly. In late 2016 this is what we had to say in our blog about 2017.

Seemingly, every single investing professional that we read or talk has the same expectations for 2017. Experts see a January dip being bought and Wall Street’s best and brightest see 2017 returning a rather staid 5% on average according to Barron’s. We have a funny feeling that isn’t quite how it’s going to work out. When everyone agrees – something else will happen. 

There was no dip to be bought in January and, obviously, the market returned far more than 5%. Since December 2016 in the post Trump election world we have been harping on the idea that we could see a 1987 type of market. While that year brings nightmares to investors you have to remember that before the October crash the market was up 35% on the year. Well, the Dow Jones is now up 35% since Trump was elected while the S&P 500 is up just over 26%.

Our attention in 2018 will be dominated by the draining of liquidity by the world’s central banks. Available research estimates that the G4 balance sheets will peak in Q1 of 2018 and begin to decline. An inflection point will be reached in or around the summer of 2018 when liquidity injections by all four major central banks will end and central banks will begin to drain that liquidity. Since the dawn of the crisis we have felt that any draining of liquidity by central banks would cause markets to shudder. We expect no less in 2018 if central banks should go forward with their plans.

The Fed put strike is falling with rising rates even if markets don’t realize it. As our Head of Global Economics, Ethan Harris, has pointed out, sitting at the lower bound in rates put the Fed in risk-management mode, meaning they had to be ultrasensitive to the risk of making a policy mistake as they had no traditional ammunition to fight a potential downturn. But as the Fed gradually increases rates, and with markets seemingly unconcerned, they will inherently become less sensitive to risk. In other words, the Fed put strike is falling both because the Fed is rebuilding ammunition, and because it recognizes that markets can better stand on their own. Of course surprise inflation remains the real killer as it would effectively handcuff the Fed from providing a high strike put, and will require much higher stress before they can step in. – Bank of America

Investors are seemingly whistling past the graveyard. The market continues to move higher with the underlying belief that any market turbulence will be met by the Federal Reserve’s (The Fed Put) efforts to calm markets. Are they right? As Bank of America is saying investors may be overestimating the extent to which the Federal Reserve can or will seek to contain any market damage.

We still see the possible tax reform passage as a “sell the news” event especially in light of end of the year regulatory funding issues. We are beginning to see some stresses in the system due to that end of the year regulatory funding. Not a major problem but it could cause some ripples. Investors may be looking to push sales and any subsequent gains into 2018. That could cause more selling at the beginning of 2018. This could be a negative unintended consequence of the tax bill passage.

We hope that you will not take us to task for not posting yesterday. We took the day to spend it with our children in the snow. It doesn’t snow that often here in Atlanta, never mind 5 inches of snow, so we take our opportunities when we can.

The market is showing signs of slowing its ascent. It needs a breather although the Santa Claus Rally is just around the corner. We are watching key levels on the charts that the computers might be pointing to. We are also formulating our end of the year letter which will be out in several weeks and we hope to point to more of what we see happening in 2018.

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I  think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com  or check out our LinkedIn page at https://www.linkedin.com/in/terencereilly/ .

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

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