If you had said at the beginning of 2016 that the Chicago Cubs would win the Word Series and a reality TV star would take the White House, most people would have laughed in your face.
And if you had said at the beginning of 2017 that the president would diss his own intelligence agencies and side with the Russians, and that we’d get the clearest evidence yet that UFOs are real, I’d have said you’re ready for the funny farm.
But these things did happen, proof that the most outlandish things sometimes come true. “Conventional wisdom” is often neither conventional nor infused with wisdom.
What on earth could 2018 bring? Here are a few things to chew on.
Many folks think the S&P 500
Dow Jones Industrial Average
and Nasdaq Composite
—all of which has been soaring since March 2009—will continue its upward march. If you’re one if them, there are good reasons to be cautious.
First, the two things that have supported stocks these past nine years—rock-bottom interest rates and a $4.5 trillion spending spree by the Federal Reserve designed to push investors into risky assets (i.e. equities)—are going away. The Fed has raised rates three times this year and three more hikes are expected in 2018. And that $4.5 trillion balance sheet—comprised of government bonds and mortgage-backed securities—is being wound down.
These two things are the principal reasons corporate profits and stocks have skyrocketed, and the housing market came roaring back since 2009. It doesn’t matter what Barack Obama told you when he was president or what Donald Trump tells you now. Those are the reasons.
Still think you know better? Then answer this question: Why are you so bullish on stocks when some of the most legendary investors in North America—with incredible records going back decades—are sitting on so much cash? As a percentage of equity, Warren Buffett’s Berkshire Hathaway
is sitting on about 33% cash, according to the company’s latest SEC filing—a percentage that has been creeping up since 2013. “I hate cash,” Buffett told CNBC in May. You know what he hates more? Paying too much for stocks. One of the Oracle of Omaha’s favorite metrics—total stock-market value as a percentage of the U.S. economy—says U.S. stocks are dangerously overvalued.
Two other investing powerhouses are even more cautious. Fairfax Financial chief Prem Watsa, dubbed the “Warren Buffett of Canada,” is now about 43% in cash (about $17 billion), while Seth Karman of Baupost Group—and author of “Margin of Safety”—the classic book on value investing—is holding about 40% of his firm’s assets in cash.
What do you know that these three men don’t? I’m all ears.
So that’s one prediction for 2018: the stock market is due, perhaps way overdue, for a pullback.
Read: Jeff Reeves offers 18 predictions for 2018 on the stock market, FAANGs and bitcoin
People also assume that the economy will soar in 2018. The Fed doesn’t. Its forecast calls for 2.5% growth in 2018, slowing to 2.1% in 2019. These forecasts include the new tax law, which outgoing chair Janet Yellen says “will likely provide some lift to economic activity.”
Read: Hiring like it’s 1999: U.S. jobs market hasn’t been this good in decades
Turning to politics, “conventional wisdom” says President Trump had a horrible year. I don’t like Trump, think he’s corrupt, dishonest to the bone, mentally unbalanced and totally unqualified to be president. Yet I concede that he has delivered for his base in 2017: there is another conservative justice on the Supreme Court, other federal judges have been installed, he helped push a huge piece of tax legislation through Congress (I’m not saying it’s good, only that he delivered on a promise. Regulations have been cut, a possible boon for business going forward.
Read: Peter Morici says the Republicans’ grand supply-side experiment will work
His base is thrilled. But that’s maybe 40% of the country. The rest of the nation—and most of the world—sees Trump as an embarrassing, dangerous buffoon. Instead of uniting Americans like he promised, he has taken existing divides on gender, race, etc, and made them worse. Turning people on one another, dividing them—as Trump likes to do—will never make America great.
Recent governor’s races in Virginia and New Jersey, and the recent senate race in Alabama were all seen as referendums on Trump. All three went decisively to Democrats. This and other data, suggests a “wave” election could swing the House to Democrats in November, and perhaps even the Senate. If that happens, Nancy Pelosi becomes Speaker of the House and Chuck Schumer will be Senate Majority Leader.
Read: It will take more than Doug Jones’s win over Roy Moore to undo Trump
Conventional wisdom suggests these are real possibilities, but that same conventional wisdom also had Hillary Clinton crushing Trump a year ago. So be cautious of political predictions. It’s possible that if the economy continues to improve, if unemployment remains low, when people start seeing slightly bigger paychecks, that the current momentum that Democrats have could dissipate. It’s also worth noting that even though most Americans say they’re sick of Trump and sick of Republicans, they’re not putting their money where their mouth is. When it comes to cash—needed to buy ads, analyze voter data and get people to the polls—Democrats begin 2018 with a sizable disadvantage.
So as 2018 dawns, beware of conventional wisdom about anything—the markets, the economy, an election that’s still 10 months away. The only prediction I’m completely confident in making is that were in for a few surprises.
I end with this: Let’s try and stop squabbling so much with each other. We’re all in this together. I wish you a happy, healthy, prosperous and peaceful 2018.
More from Paul Brandus: Rural areas are in a ‘destructive downward spiral,’ no matter what Trump says