Byron Wien, a Wall Street icon and vice chairman of Blackstone Advisory Partners, is trying to stay optimistic about the stock market despite a laundry list of negatives that could undermine Wall Street.
“While I believe we are in a period of secular stagnation where valuations are high and profits are likely to be disappointing, I do think there is a bull case out there,” he told Barron’s.
He described a positive scenario if all the chips fall into a particular order:
- "Hillary Clinton is elected president by a wide margin and at the top of her agenda is infrastructure spending.
- She persuades Paul Ryan to rally Republicans in Congress to pass an ambitious program to upgrade our roads, bridges, airports and tunnels. Her argument is that a bipartisan effort will benefit both political parties. Jobs are created as the projects get underway.
- Consumer spending improves because the infrastructure workers now have the resources to buy what they had postponed.
- The price of gasoline edges up and inflation moves above 2% but this gives companies some pricing power which had been lacking.
- The Federal Reserve begins to raise rates, putting more money in the hands of retirees.
- Energy companies are heartened by the improvement in the economy and the rise in oil prices and they begin to spend money on capital projects, creating more jobs.
- The minimum wage begins to rise across the country.
- With real growth above 2%, corporate profits begin to rise, justifying higher stock prices.
- Investors become enthusiastic about opportunities in equities. Entrepreneurship flourishes and the initial public offering market becomes strong again.”
However, he was quick to note that there are many lurking dangers hiding along the road to his depicted economic nirvana.
“My principal worry is earnings disappointment. According to Bianco Research, revenues in 2017 for the S&P 500 are only expected to increase 2%. Energy is a key part of the revenue problem, but even if you leave the energy sector out of the tally, the increase in revenues is only 3%,” he said.
“The other key challenge to the bull market is monetary policy. I have long argued that the accommodative policies of the Federal Reserve have played a major role in the increase in equity prices since 2009. We know that the next Fed move is likely to be toward higher rates and we are likely to see a 25 basis point increase in December,” he said.
“I also am concerned that a strong dollar, partly resulting from the Fed tightening in December might be a negative. Many investment managers have had lackluster performance this year and they want the market to go up before 2017 begins to give their clients confidence, but over the years I have found that the market rarely provides what most of its participants desire," he said.
"In this environment, knowing where to put your money is difficult. In equities, I still like several of the dominant Internet companies that will have open-ended earnings for some time, depressed biotechnology with strong pipelines and the emerging markets that are undervalued relative to the developed world.”
The tumultuous presidential race between Democrat Hillary Clinton and Republican Donald Trump has appeared to tighten in the past week after news that the FBI was investigating more emails as part of a probe into Clinton's use of a private email system.
Meanwhile, HSBC Holdings Plc predicted there's one certain winner of next week's presidential election: investors in gold.
Although they deem a Donald Trump victory more supportive for the price of the metal than a win by Hillary Clinton, the bank's Chief Precious Metals Analyst James Steel told Bloomberg it'll enjoy at least a 8 percent jump whoever wins the race.
If the real-estate magnate triumphs, gold could rise to $1,500 an ounce, according to HSBC, up from around $1,289 Tuesday in New York.
"There is concern over Trump being unexpected, because the market has really priced in a Clinton win and it hasn’t priced in a Trump win at all," Ken Polcari, director of the NYSE floor division at O’Neil Securities in New York, told Reuters.
In addition, the Federal Reserve is holding its two-day policy meeting, with its statement due on Wednesday. While traders do not expect the central bank to raise interest rates just a week ahead of the presidential election, they are looking for signs confirming that the Fed is set to hike rates in December.
"It’s really hitting the dividend-yielding names harder than anything else...," said Stephen Massocca, chief investment officer at Wedbush Equity Management LLC in San Francisco. "I don’t know if there is a new 'taper tantrum' sort of building here on concerns the Fed will act in December and the whole low interest rate environment is about to change."
(Newsmax wire services contributed to this report).
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