By Roger Nusbaum, AdvisorShares ETF Strategist
As 2017 starts to wind down we will soon be inundated with price targets for the S&P 500 for 2018. This has already started to trickle out of course with a few here and there. Credit Suisse is looking for 2875 for example while Goldman Sachs is calling for 2850. There are more out there with more likely to come.
About a year ago, Business Insider posted 2017 predictions from many of the brokerage houses with most of them congregating at 2300-2325 for the S&P 500. The idea of congregated predictions is something I learned about many years ago during my time working at Fisher Investments. Ken Fisher, the firm’s namesake, observed that these predications have a tendency to gather in the same areas and this has been true far more often than not.
Part of the equation here, yes this is skeptical, is career risk. Strategists take on some amount of career risk when they are terribly wrong by themselves. If they are terribly wrong in a crowd, they can point to they’re having been in line with consensus.
Fisher took the idea further, believing that if most of the strategists are congregating around a 10% gain, that the crowd is probably wrong, that such a group of predictions is probably priced so from there he would try to ascertain whether conditions favor the market’s doing better than that consensus or worse.
No one can know what the market will do, especially over the course of some arbitrary period like a calendar year but I do believe in taking an inventory of the positives and negatives to try to glean a more probable outcome, almost like a diffusion index.
The narrowing leadership and breadth indicators have been negative for quite a while as just a handful of stocks have done much of the lifting of the index this year. This is unquestionably a negative in my opinion but the predictive value for when the market will turn down isn’t very good. Bad breadth in this context could remain bad for quite a while longer. What if the same four or five mega cap tech stocks that have propped up the market in 2017 go on to all double in 2018? That’s not a prediction but if it were to happen, I would think the S&P 500 Index would be up a lot.
I tend to think that signs the market is rolling over offer more predictive value than breadth and for now, the market is not rolling over in my opinion. Whenever that does happen, now or later or much later, I would want to take defensive action but that hasn’t happened yet.
No matter what conclusion you draw, realistically it is a guess which is why sticking to investment process is the most important thing. At 18% YTD for the S&P 500, it is up a lot this year. An investor with a reasonably diversified portfolio who stayed invested is probably pretty close to that 18% either way. Pretty close could mean 13-14% or maybe somewhere in the twenties but someone up 6% because they made changes based on some sort of prediction (their own or someone else’s) has wasted a year in which the market went up a lot. We don’t necessarily get a lot of 20% years, so they shouldn’t be wasted.
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