The following is a summary of our recent interview with Craig Johnson CMT CFA, which can be accessed on our site here or on iTunes here.
Investor and consumer sentiment is turning more bullish, but one major bull we’ve been speaking with for years, Craig Johnson, a senior analyst and market technician at Piper Jaffray, thinks stock market gains for 2017 won't be nearly as good as last year.
Market Direction and Sentiment
Johnson's year-end target on the S&P 500 for 2016 was higher than most at 2,350. That seemed almost impossible after the market's double-digit correction starting out the year but, after bottoming in February, the S&P 500 managed to stage an impressive recovery and only came 72 points shy of his target by the end of 2016.
For this year, he is much less bullish and laid out a 2,424 target on the S&P 500, slightly less than a 2% gain from current levels (2,380 as of March 16th).
“Over the short-term, we’re overbought,” Johnson said, with the likelihood that we see either a correction in the near-term in price or in time, i.e. a consolidation.
2017 is likely to be a good “single-digit” year, he stated, but probably not a great year where we’re up double digits.
Rates, Rotation, and Reflation
Interest rates are going up, Johnson stated, some of which we’ve already seen. More importantly, he stated, the yield curve between the 2-year and 10-year has steepened.
“I think that’s probably as important as the actual 10-year bond yield,” he said. “We still see rates going up.”
His call for 10-year bond yields by year-end 2017 is for rates between 3-3.25%.
Perception and sentiment on rates are starting to suggest the possibility for a reflation trade as interest rates are finally starting to go up, he added.
Reversing a 30-Year Downtrend
“The most significant thing with rates going to 3 percent this year, is that rates reverse a 30-year downtrend,” Johnson said. “I think at that point in time we get the biggest thing a lot of bulls on Wall Street have been looking for, which is a rotation out of fixed income and into equities. That’s where I think the bull market will get another leg to go ultimately higher.”
This is more of a 2018 story, though, he added. If we’re going to get a reflation trade to kick off, some of it will depend on what happens in Washington. The prior administration was trying to drive recovery through monetary policy rather than fiscal policy, Johnson stated.
“Clearly, that did not drive a pickup in a meaningful way for overall gross domestic product,” he said.
Under the new administration, we’re likely to see tax cuts and changes to the accounting rules of depreciation, which will incentivize spending and refresh infrastructure.
“Under this kind of reflation trade scenario, I would think basic materials could do very well, and I would also think the tech sector could probably do very well under that kind of setup,” Johnson said.
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