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posted on 20 December 2017

My 5 Predictions For 2018 And If 3 Comes True You'll Need To Act Fast!

by Jim Pearce,

Investing Daily Article of the Week

Making predictions is often referred to as a fool’s errand since the future seldom unfolds as we expect. All those political pollsters that confidently predicted a Hillary Clinton victory in last year’s U.S. presidential election can give testimony to that truism.

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The fact of the matter is we make decisions every day that to varying degrees rely on assumptions about the future. If I did not believe that the stock market would be higher five years from now, then I would not own any equity funds in my 401(k) account. And if I thought the real estate market was about to crash, I would sell my house now and buy it back (or one just like it) a lot cheaper in the future. But I have not done either of those things based on my expectation for the future.

Making long-term predictions is easy, but guessing what will happen next week or next month is nearly impossible. For that reason, most analysts prefer to dwell on what has already happened, since the empirical truthfulness of past events is indisputable. For example, we know with absolute certainty that the S&P 500 Index (including dividends) has increased in value every year since 2008. What we don’t know is how it will perform in 2018.

Here’s the List

However, an inability to see the future does not mean there is no value in attempting to anticipate it. As the great mutual fund manager Peter Lynch once said, “In this business, if you’re good, you’re right six times out of ten."

According to that math, if I get at least three of the following five predictions for 2018 correct then I’m doing okay. Here they are:

  1. The price of oil will rise above $70 a barrel. Most energy analysts are pegging $60 - 65 as the likely range for oil prices next year. But I believe so long as Saudi Arabia intends to sell a 5% stake in its state-owned oil business it will do everything in its power to drive up oil prices just before the deal goes public.
  2. Amazon’s share price will drop below $900. That may not seem like a bold statement since it was only eight months ago that AMZN traded above $900 for the first time. But since then it has risen above $1,100 meaning if my prediction comes true then AMZN is in for a 20% drop in 2018.
  3. The FOMC will raise the Fed Funds above 2.5%. The current “dot plot" for 2018 shows a median estimate of 2.125% as the target for the Fed Funds rate. However, a tightening job market and rising commodity prices should push the CPI higher than expected by next summer. If that happens, the bond market could be in for its worst year in a very long time.
  4. The Price of Bitcoin will drop by more than 50%. Assuming this hasn’t already happened by the end of this month, bitcoin will crash in 2018 due to a major security breach setting off a selling panic. Given its meteoric rise, a drop of 90% isn’t out of the question since that would put it back to where it was only seven months ago.
  5. The S&P 500 will end the year with a loss. If I’m right about the first three predictions, then this one almost has to happen. Rising oil prices are good for the energy sector but bad for the overall economy. Accelerating inflation combined with a cratering bond market would push interest rates considerably higher, making future earnings less valuable. The net effect would be discounted stock prices that are currently priced for perfection.

To be clear, these aren’t guesses. I genuinely believe each one of these things is likely to happen within the next twelve months. Of course, I could very well end up in the same camp as all those chastened political pollsters, unable to explain exactly where my reasoning went amiss so I’ll make a note to check back this time next year to see how I did.

And when I do, please don’t forget that three out of five ain’t bad!

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