Raising My 2018 Stock Market Targets
When I ran the equity trading desk at Morgan Stanley, whenever traders got bored they would sit around their desks speculating about which single event would most totally destroy financial markets.
Nuclear war was always a favorite, but that fell by the wayside after the Soviet Union collapsed and we bought all of their excess uranium and plutonium.
A giant earthquake in Japan was another, as they are large global investors. The idea was that they would have to sell all their foreign assets to finance reconstruction at home.
However, for the past decade, a new Armageddon scenario has been circulating the trading community. What would happen if China decided to suddenly dump its US Treasury bond holdings (TLT)?
The general expectation was that the ten-year Treasury bond yield would instantly spike by 100-200 basis points, stocks (SPY) would crash, the US dollar (UUP) would soar, and the world would enter a global recession.
A rumor that this disaster scenario was about to unfold hit the bond markets yesterday. The Chinese immediately branded it as “fake news”.
I called my friends at the Bank of China, with whom I’ve had a relationship since the mid-1970’s (yes, it was I who convinced them to buy all those European bonds when they were yielding 10%). They poo pooed the idea, which means it’s being seriously considered.
Bond yields rose by 6 basis points, stocks suffered a 100 point one hour correction, and the US dollar went nowhere against most currencies.
However, the writing is on the wall. The Middle Kingdom has been slowing building up their carrier fleet They now have two, compared to America’s ten, and a third is under construction, a reverse engineering of a small Russian ship they bought years ago.
These will be used to protect China’s extended supply lines all the way to the Persian where they now account for some 80% of all oil exports. You know all the US troops we have in the Middle east? They’re there to protect primarily China’s oil supply, not ours. Talk about mission creep!
If push comes to shove in the South China Sea, and Trump is clearly headed in that direction, then fantasies of foreign bond liquidation could suddenly become reality. Even a buyer’s strike will demolish Trump’s hopes huge deficit financing, where the Chinese are expected to buy half the new paper issued.
The resilience of the markets in the face of China’s end of the world threats lead me only to one conclusion: stocks markets aren’t going down again, ever! The trees WILL grow to the sky!
I am therefore raising my yearend targets for the major stock indexes to $30,000 for the Dow Average and $3,200 for the S&P 500. That increases my projected return on equities from 12% to 20%.
To use Warren Buffet’s characterization, chopping the corporate tax rate from 35% to 21% means your take home has risen from 65% to 79%, an eye-popping increase of 21.54%.
That means the value of US stocks jumped by 21.54% overnight when the calendar turned the page from December to January. No wonder the market has gone up every day!
The (SPY) has risen by 3.75% so far in 2018, which means we have another 17.79% to go. And if I’m wrong in my forecast it’s not because I got the upside targets wrong, it’s because we are about to hit it in March instead of December!
Why are we getting such a belated move in stocks from an event that was advertised daily since November 8, 2016? We only had the Obamacare debacle as a guide for Republican legislative effectiveness until now.
The contents of the tax bill were kept secret until the day after it was signed on December 22, 2017. But by then everyone’s accountants were sunning themselves in Antigua or schussing the slopes of Aspen. It wasn’t until days later when we learned who got the carrot and who got the stick.
That has allowed the bunching up of reaction into the first half of January this year.
I am holding fire, attempting to scale into my 2017 book slowly, having used the two point rally in bonds (TLT) to add my first short position of the year.
As they teach you in the Marine Corps. Flight School, “There are bold pilots, and there are old pilots, but there are no old, bold pilots.”
I am an old pilot. Semper Fi!
The black swans are on my radar ever circling just over the horizon.
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