Topping off a strong 2017.
Happy 2018! It has already gotten our attention with snow and frigid temperatures. I think 2017 surprised most of the experts with its strong stock market returns and overall financial health. The S&P 500 was up 6.64% for the 4th quarter. The MSCI EAFE Index of international markets was also up 4.00%. Lastly, the Bloomberg Barclays Aggregate Bond Index increased 0.39%. Let’s review 2017 and then look ahead to what 2018 might have in store.
2017 saw a confluence of events that help pushed world markets higher. Corporate earnings, a primary driver of the stock market, were more consistent and stronger than expected. Additionally, global economic growth increased and was more consistent across countries and markets. Lastly, monetary policy (interest rates and central banks) continue to be favorable to business. While it’s too soon to tell the lasting impact of the recent tax reform, most viewed it as pro-business. In regard to the strong stock market, relatively few companies drove a lot of the increase (specifically the tech sector). This has left tech sector looking expensive compared to other areas. When the return side of the equation looks too pricey, it’s time to consider risk and take some profits. The best protection to an overvalued market or market sector is always broad diversification.
With 2017 in the rearview mirror, where does that leave us for 2018? In two words, cautiously optimistic. Many of the same drivers that pushed the market up in 2017 are still in place for 2018 and may continue the markets’ rise (profits, GDP growth, low interest rates). I think there are three things that are of possible concern, one anecdotal and two data driven. Anecdotally, most of the 2018 market outlooks from Wall Street that I have read are looking for the bull market to continue. While not scientific, when I see that much uniformity I get concerned. The old Warren Buffet adage comes to mind; “Be fearful when others are greedy and greedy when others are fearful”. On the actual data front, the low level of volatility from 2017 can lull investors to sleep and then panic when it reappears. Last year we did not have one day where the S&P 500 fell 3.0%. The last time that happened was 15 years ago. Historically markets go up about 80% of the time, which means conversely, they go down 20% of the time. Will a few bad days, caused by an overheated market or world politics be a catalyst? Lastly, corporations will need to deliver the anticipated profits to keep up the market growth.
In the construction of all client portfolios, we want to participate meaningfully on the upside, while protecting downside risk. 12-month market forecasts have a history of mixed results. Diversified, low cost, tax efficient portfolios, based on great companies or funds increase the long-term probability of achieving your long term financial goals.