I was in the camp of most market watchers that 2017 was going to be a wild, volatile ride with the Trump administration and Republicans taking control of Congress, the Federal Reserve raising interest rates, and Russian/China flexing their muscles militarily. So, what happened? We got the lowest volatility year on record and stocks (the S&P 500) never fell more than 3% at any point during the year.
- The S&P 500 has risen for nine consecutive quarters and in 18 out of the last 20 (including the quarter ending on 12/31/17). It gained 19.4% in 2017.
- There were only been seven sessions in 2017 in which the S&P 500 gained or lost 1% or more on a closing basis. The S&P 500 has never gained or lost more than 2% on a closing basis. In 2009, there were 55 separate 2% up or down days and there were 35 in 2011 (source: A Wealth of Common Sense).
- Interest rates (US 10yr Treasury), didn’t increase but actually declined slightly during the year.
Clearly my crystal ball is cloudy, but I am grateful that my generally optimistic outlook during 2017 led me to adjust client portfolios along the way to allow them to participate in much of the positive outcome.
For my 2018 outlook I am taking a different approach. Rather than forecasting what stocks and interest rates may do during 2018, my process is to analyze the current conditions to identify the dominant trends in place, and then adjust accordingly throughout the year as those trends change. Today’s trends will certainly change throughout the year. That’s one reason I write an Outlook every month, instead of just once per year.
So what are the current conditions and major trends in place as we enter 2018?
- What impact will the new US tax laws have? How will this impact the US economy and corporate earnings going forward? Will the tax cuts encourage business to invest and consumers to spend?
- There is a new Federal Reserve Chairman and several new members of the FOMC (the committee that sets monetary policy). How well they handle keeping inflation in check, raising interest rates, and unwinding their balance sheet without putting the brakes on the longest economic expansion since the Great Recession (2009) is a big question.
- How will the Trump administration’s nationalist/protectionist trade policies impact the economy?
- Continued geo-political turmoil around the world. Obviously North Korea is an ongoing concern but the recent uprising in Iran could also further destabilize the Middle East.
- Will the positive trend in economic growth continue in the US and Globally? The following charts seem to indicate yes.
National Bureau of Economic Research uses these 4 indicators most heavily when looking at the US economy. Clearly all are in solid uptrends.
Organization of Economic Cooperation and Development – December 2017 report
(source: State Street Global Advisors)
Overall, I expect that economic growth will continue both here and abroad, which should continue to support the bull market in stocks for 2018. I expect stocks to do better than bonds. However, I do not expect the ride to be quite as smooth as it was in 2017. I will continue to monitor current conditions and trends and adjust your portfolio accordingly.
It is said that history doesn’t repeat itself but it often rhymes. Case in point, the S&P 500 has gained more than 18 % in a year 20 times since 1951. Those advances have been followed up by an annual increase of more than 10% in 10 years during that time, with 5 years having gains of 0-10% and 5 years with returns below 0% . Let’s see what 2018 has in store!
January Calendar of Events (comments and additions for future months are always welcome)
- January is National Blood Donation Month. I’m donating on the 18th. How about you?
January 5th My granddaughter Isys turn 12. They grow up way too fast.
January 10th My better half, Eloise’s birthday.
January 15th the 8th anniversary of my independent practice – thank you to all my loyal clients.
January 15th Martin Luther King Day. Let’s pray for more racial tolerance and understanding.
I hope this information is helpful. Please share it with family, friends, and colleagues.
Sources: Raymond James & Assoc, Advisors Perspectives,CNBC.com, State Street Global Advisors