Will stocks around the world soar in late-2017?

Right now we think that the U.S. stock market will make a small correction before this summer is over (see post). If this happens, then it is a perfect setup for a rally in September-December 2017. Here are the bullish factors that will probably drive stocks higher at the end of this year.

October, November, and December are the best months for stocks

In terms of seasonality, the last 3 months of every year tend to be the most bullish for the S&P 500. See the following chart.

There is a fundamental reason for this seasonality. The long term direction of the U.S. stock market follows the state of the U.S. economy. Sometimes the medium term direction follows the economy as well! The economy tends to improve in the final 3 months of the year because of year-end shopping and people finally settling down in their jobs after the summer holidays.
Seasonality on its own does not mean much. In some years the S&P will crash in October despite the bullish seasonality. However, when the S&P falls before Q4 during a bull market, it tends to rally in Q4. Right now we think that the S&P will make a small correction before this summer is over. Our model also states that we are still in a bull market.
So it’s likely that the S&P will make a small correction before this summer is over and then rally throughout the rest of the year.

Trump’s pro-growth plans

Trump’s tax cut and infrastructure spending plans will need to wait until autumn. His proposed bills are going through Congress at a snail-like pace. Congress goes on recess in all of August, during which no bills can be passed. There are less than 3 months between now and the recess, so it’s unlikely that Trump will pass any pro-growth policies from May – July.
This means that there will be little bullish news from the White House until September.
But when Congress comes back from recess in September, Trump and his team can start to push his pro-growth policies through Congress. Most of his proposed policies will not get passed, but some will. As we have stated before, the market already expects that Trump will not pass any pro-growth policies. So any pro-growth policies that he does pass will merely be a bullish surprise for investors. Hence, this is a bullish factor for the S&P 500 in late-2017.

Will Chinese stocks rise in late-2017?

There is a rather strong correlation right now between stock markets around the world. This means that a rallying Chinese stock market will give the U.S. stock market an extra boost.
China’s economy improved markedly throughout 2016 and early-2017. Since then, the Chinese economy has plateaued because the Chinese government is clamping down on real estate speculation and China’s domestic credit markets.
China’s economic direction is determined primarily by its President Xi Jinping. Right now, Xi is too busy focusing on politics to focus on economic growth. China will host its National Congress of the Communist Party of China in October 2017. China has a 10 year term limit for its presidents, and Xi’s term is supposed to expire in 2022. During the meeting in October, Xi will be looking to extend his term beyond 2022. So until the meeting is over, Xi has no time to focus on economic growth policies. But once he’s finished the meeting, he can start to focus on propping up Chinese economic growth.
China will host its annual Central Economic Work Conference in December 2017. This annual meeting sets China’s key economic guidelines and targets for the next fiscal year. Perhaps China will announce some pro-growth policies at this meeting. If that happens, the Chinese stock market will be pushed higher. By correlation the U.S. stock market will be given a boost as well.

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