By Michal Emory on December 28, 2017
These surprises are events that I think have a significantly better chance of occurring than most people would currently expect. While many of these surprises may not be my “base case” expectation, I do believe that there is enough of a chance of them happening that they need to be watched. There will be a mix of market, sports, and political surprises.
- After a tough first quarter, the S&P 500 (“the market”) rebounds to finish up 8-9% for the year – While on the surface an 8-9% return for the market does not sound surprising, the way we get there will surprise. After investors realize in January that an infrastructure bill is not forthcoming and they begin to doubt where the next catalyst will come from, the market begins to correct. And correct it does. After not having experienced a 10% correction for two years, a little selling begets panic and the market finishes down over 10% for the first quarter. What starts the market rebound you ask? I am glad you asked, let us see what is that catalyst in surprise #2.
- With Republican poll numbers lagging and the prospect of losing the House AND the Senate becoming very real, the Republicans manage to pass an infrastructure bill in the second quarter – This surprise bill gives a jolt to the stock market as the combination of new infrastructure spending and the effects of the tax bill start to impact the economy. This boost leads to a big increase in the market and enables the Republicans to hold onto the House and the Senate and pick up a few seats.
- Buoyed by a 10-2 regular season that includes spectacular games in close losses to Georgia and Alabama, Drew Lock wins Missouri’s first Heisman Trophy – Having watched this young man many times this past season and seeing his remarkable growth from the start to the end of the season, I am expecting great things in 2018. Missouri’s defense is not the best, and that provides ample opportunity for Lock to put up huge numbers in 2018.
- Bitcoin falls below $2,000 – This rise in Bitcoin in 2017 has been nothing short of astonishing. But while that rise probably continues early into 2018, there are several headwinds that eventually catch up with it. From technological issues to becoming a true currency, to (I believe) coming regulatory issues, to intervention of governments, to potential hacking scares, the juice finally runs out in 2018. As selling begets more selling, it turns into a full-fledged rout.
- Bill Snyder leads Kansas State to the Big 12 Championship game in what may be his final season – Bill Snyder is more than a legend at Kansas State and in the college football world. Amongst speculation of whether 2018 is his final season as head coach, and behind the best passing attack in years for Kansas State, they surprise the Big 12 and make it to the conference Championship game.
- Oil breaks above $80 a barrel – Oil has not been above $80 a barrel since November of 2014, though that changes in 2018. A pickup in inflation, a stronger economy, and continued unrest in the Middle East all combine to push oil above $80.
- Emerging Market stocks triple the returns of the S&P 500 – Emerging Market stocks have finally broken out in 2017 and that continues in full force in 2018. As investors start to be more concerned with valuations in the U.S., they notice the significantly cheaper valuations of Emerging Markets and begin piling into that segment, boosting returns even more.
- The Kansas Jayhawks’ string of consecutive Big 12 regular season titles comes to an end, but Bill Self still leads the team to the NCAA Championship game – While the remarkable regular season streak comes to a crashing end, it has an unexpected positive effect. With lower NCAA Tournament expectations in many years, the players come into the tournament loose and hungry. This leads to an upset of Duke in the Final Four culminating in a Sunflower State showdown in the Championship game against Wichita State.
- For the first time since 2007, the annual inflation rate finishes over 3.5% – With a tighter labor force, and corporations flush with cash, wage inflation begins to grow quite dramatically as companies struggle to fill needed positions and show they are being good stewards with the extra cash from lower tax rates. Added to this is an aggressive Federal Reserve led by new Chairman Jerome Powell. While this higher inflation does slow the economy, concerns do pick up that inflation could become too high.
- Motivated by what he feels was an unwarranted suspension, Ezekiel Elliott becomes the first Cowboy to rush for 2,000 yards in a season and breaks Emmitt Smith’s Cowboys record for most total touchdowns in a season – Elliott has plenty of motivation this off-season. Add to that an aging receiver corps and the Cowboys are going to need to lean on Elliott in a big way next year. Dallas will also have a softer schedule in 2018, leading to an MVP-caliber season from Elliott.
Michal Emory, CFA, is The Trust Company's Chief Investment Officer and heads the company's Investment Committee. To learn more about Michal, click here.