By William Davis


So, a few traders traded Friday and, in a holiday-shortened session, managed to negotiate the S&P 500 past 2600 for the first time ever. For those keeping score, it was the big benchmark’s 55th closing high of the year. Taken together with the NASDAQ’s 69 record closes and the Dow’s 60 new highs this year, one could easily surmise that 2017’s been a pretty good year. One would have a much tougher time, however, finding a Wall Street analyst who saw anything of the sort coming.

HENSLOWE: “Mr. Fennyman, let me explain the business. The natural condition is one of unsurmountable obstacles on the road to imminent disaster.”

By way of unrefreshing refresher, our inboxes were clogged this time last year with “reflation trade” outlooks predicting higher bond yields, a stronger dollar, and modestly improved stock prices.  A year on and almost every analyst was wrong…one might suggest pathetically wrong. At this hour, inflation hasn’t materialized, Treasury yields are lower, the dollar is down, and the S&P 500 has delivered more than double the gains of even the most bullish Wall Street scribbler.

FENNYMAN: “So what do we do?”

For our part, we are unsurprisingly not surprised. Like many, we know that over the past decade Treasury yields have been forecast to rise every year, yet they have gone down more often than not. We’re aware, too, that over the same period the average S&P 500 forecast of strategists has seldom been anywhere near the actual result, and has missed most of the time by an amount greater than the S&P’s 9% long-term return. One might say Wall Street predictions are less reliable than a coin toss.

HENSLOWE: “Nothing. Strangely enough, it all turns out well.”

In fact, the whole prediction process is essentially unpredictable. Why? Because forecasting markets involves assessing both when already assumed predictions will change as well when the markets’ underlying fundamentals might change. So, even if a prognosticator is lucky enough to be right about events, it really doesn’t help anyone who’s actually investing. One might think that’s sillier than silly.


So while the markets have consistently performed contrary to even a contrarian prediction, industry strategists shrug their shoulders and move on to their 2018 guesses. Their forecasts so far suggest the stock rally will continue and bond yields finally start to rise, if a bit less than they thought before. Gee, one might infer they’ve taken the path of least usefulness.

HENSLOWE: “I don’t know. It’s a mystery.”

Among everybody, nobody’s ever said forecasting is easy. But more than a few around the industry have pointed out just how pointless the whole thing has pointedly been. One might wonder why anyone bothers.

(Quotes from Shakespeare In Love, 1998)

What the equity markets have been doing…

Stocks rose across the two-week stretch, with most of the important benchmarks touching new intraday records during post-Thanksgiving Friday. Small-cap stocks, for no apparent reason, recorded the largest gains. The technology-heavy NASDAQ also performed well, and for good reason, with big boosts from Internet-related giants like Facebook, Apple, Google, and Amazon. Among the broader sectors, Healthcare and Consumer Discretionary were relatively strong while Financials lagged.

Response to news on the economy was mostly mixed, though a strong existing home sales report helped lift the market on Tuesday. Weekly jobless claims, meanwhile, remained near historic lows, but October durable goods orders fell well short of consensus estimates. Minutes from the Fed’s policy meeting were generally interpreted as dovish, with several officials expressing concern about the persistence of below-target inflation.


INDEX Friday’s Close Two-Week Point Change Year-to-Date Change
DJIA 23,557.99 +135.78 +19.20%
S&P 500 2,602.42 +20.12 +16.24%
NASDAQ 6,889.16 +138.22 +27.98%
Russell 2000 1,519.08  +42.37   +12.08%


What the fixed income markets have been doing…

Economic data was not lost on bond traders, meanwhile, where news helped reverse an earlier rise in longer-term Treasury yields. Investment-grade corporates, despite a relatively empty new issue calendar, had a healthy tone for the period, as did high yields, which benefited from the equity rally. Tax frees were little changed amid an extremely light calendar.

FIXED INCOME Period Change YTD 12 Months Yield
U.S. Treasuries
2.4% 2.3% 2.3%
U.S. Investment Grade -(0.1)% 5.8% 6.6% 3.2%
U.S. High Yield -(0.1)% 7.0% 9.3% 5.7%
U.S. Municipals +0.2% 4.8% 5.2% 2.4%
Non-U.S. Developed -(0.1)% 10.4% 9.6% 0.7%


What the numbers are saying…

  • 24,000

The number of self-driving taxis Volvo said it has agreed to supply Uber beginning in 2019 — one of the first and biggest commercial orders for such vehicles.

What people have been saying…

“The era of the human-driven automobile, its repair facilities, its dealerships, the media surrounding it — all will be gone in 20 years.”

  • Bob Lutz, former vice chairman and head of product development at General Motors

What the pundits have been saying…

“The U.S. is no longer the only worthwhile place to visit. Opportunities still exist in U.S. equities, but investors should make sure they put fears aside and buy that plane ticket, especially to the Eurozone and parts of emerging markets.”

  • Gabriela D. Santos, Global Market Strategist at J.P. Morgan Asset Management

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