(MENAFN- Khaleej Times) Life is a tale told by an idiot, full of sound and fury, signifying nothing. Shakespeare's words could describe the sound and fury (and farce) of Trump's first year in the White House. Yet Trump's election was nirvana for the "animal spirits" of Wall Street. The rollback of odd-Frank, tax cuts, a death sentence for Obamacare, no trade war with China, a pro-growth Republican agenda with eerie echoes of trickle down Reaganomics all led to another surge in an eight-year-old post Lehman bull market. If ever there was a year to own money centre banks and megacap technology, my top sector picks for 207 (remember pleading with my valued readers to buy Citigroup at 45, Morgan Stanley at 26, Alibaba at 90, Apple at 130 back in the Stone Age or sometime in 2016!).
"Not to know history is to remain forever a child," Marcus Tallius Cicero observed 2,000 years ago and children rarely make a killing in the US stock market. 2017 was the year of living dangerously on Wall Street, as US equities surged 24 per cent. Volatility tanked. Leverage spiked. Consumer confidence at 15-year highs. Don't worry, be happy. No hurry, no nappy!
Yet I am paid by my family and investors never to forget "history" in the stock market. I remember the 17 per cent plunge in the S & P 500 index in January and February 2016 as China mismanaged its yuan float and contagion, the digital bubonic plague of finance, spread from sunrise in Tokyo to sunset in Manhattan. Though I was short oil since November 2014, when then-Saudi oil minister Ali Al Naimi refused to defend Brent at $90 and the kingdom abandoned its role as the Opec's swing producer, I was horrified to see Brent trade below $30 in early 2016. For a ghastly moment, I thought it was Lehman or Creditanstalt all over again, the dawn of another global banking crisis.
Yet the Chinese central bank flooded financial markets with money and the Yellen Fed hiked rates only once in December 2016. This gave El Torro a new lease on life, especially since Trump's election was high octane fuel for the bulls. As the US Dollar Index began to plunge and Dr Copper began to rise, I know it was time to kowtow before the Son of Heaven in Beijing and go long Chinese equities, up 50 per cent in 2017 as the world's first synchronised global recovery gathered momentum and Xi Jinping hoarded more power in the Politburo than any of his predecessors since the death of Paramount (Viacom?) Leader Deng.
Yet I doubt if the global bull market in equities will survive into 2018. One, central bank liquidity creation will slow from $126 billion to $20 billion a month. Valuation multiples compress, not expand, when money printing morphs into quantitative tightening, as has happened in Washington and London. Two, the Yellen dot plots are delusional as the US economy is beyond (not at) full employment and wage inflation is about to spike. Financial markets will test new Fed Chairman Jay Powell, an ex-Carlyle partner, not a monetary economist in the Yellen, Bernanke and Greenspan mold. This means the wolf is finally here for the bond market. Three, the tax reform is more than priced into current levels. Buy on hope, sell on news. Four, political risk is rising for the White House as special prosecutor Robert Mueller's legal noose begins to tighten, a scenario not priced into a stock market trading at 18 times earnings. Five, the Bitcoin mania evokes the madness of the dotcom era (which I experienced) if not Dutch tulipmania, which I did not. Homo Moronicus is now just not trading Bitcoin on margin, but crypto-kittens, let alone crypto-currencies. This will end in tears. That much, at least is certain.
However, I will still "buy the dip" in the S & P 500 index, ideally at 2,360, not sell the bounce. After all, tax reform means the index's EPS could rise to 144-150. This could well mean another bull run for stocks. Yet if inflation triggers a 1994-style bond market massacre, the monetary shock waves will spread panic across global asset classes at the speed of light. An inflation spike, a geopolitical shock, a corporate growth peak, an inverted yield curve and central bank quant tightening and a trade war are all tangible risks for 2018. My call? The S & P 500 index will test both 2,300 and 2,900 next year.
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