The Week in Review
- Record-Breaking Markets
- Taxes and the Economy
- Consumers Drive Growth into 2018
- Looking Ahead
Since our company’s late-1980s origins, we have never seen markets as bullish, yet as calm, as those in 2017. It will go down in the record books as a banner year.
Amid rising geopolitical uncertainty and headline-driven media theater, record-high stock prices and record-low volatility defined 2017’s markets. The U.S. economy continued along its expansionary path. After the markets close today, the S&P 500 is set to have posted a monthly gain in all 12 months of a calendar year for the first time. And it has done so without a pullback of more than 2.8% within the year for the first time in more than 20 years.
For many investors it wasn’t easy to stay 2017’s course, as each successive market high unleashed calls to sell before the bottom fell out. We were not in that camp, instead, we kept our focus on fundamental facts rather than headline fears and foment. We saw that the U.S. economy was growing and believed that markets would follow suit. Overseas, the pace of economic growth and market gains picked up as well, and investors benefitted from global diversification.
Heading into 2018, we will be keeping our eye on the market’s most important drivers: Earnings, interest rates and economic data. Given 2017’s atypical record run, we expect to see more volatility and pullbacks as par for a more normal market course. Having a plan and staying invested through those pullbacks is key to reaping longer-term gains. Over the last 31 years, Vanguard’s 500 Index fund, as an example, has seen an average decline of nearly 14% at some point during every calendar year. And yet, the index has compounded at a 10% annual pace.
So long as the fundamentals support expansion, we think pullbacks will remain buying opportunities for our select group of portfolio managers and strategies. With our economy strong, the global economy strengthening, earnings growing and interest rates low, gains may not abound, but they will be there to be found.
As of Thursday’s close, the Dow Jones Industrial Average has returned 28.7% in 2017, while the broader S&P 500 has gained 22.5%.
We’ve already commented on the record year in the U.S. stock market, but here are two more stats: Including Thursday, the Dow index hit 71 all-time highs in 2017—a record amount for a calendar year. And on a broader scale, the S&P 500 index did not experience an intraday move of 2% or more. Not one! The year before, there were 18, and in 2015 there were 17.
Overseas markets were as rewarding as those at home. The MSCI EAFE index, a measure of developed international stock markets, is up 24.6% through Thursday. The MSCI Emerging Markets Index (comprised of markets in less economically developed nations like China, Brazil and India) has climbed 36.7%, driven by outsized gains in China, particularly among Chinese tech companies. After a decade of underperformance, foreign stocks paid off for diversified investors in 2017—a trend we believe will carry into the new year given the relatively attractive prices of international stocks and slow-growth expansion we see continuing abroad.
For all of the challenges faced by bond investors—from the Federal Reserve raising short-term interest rates and reducing the size of its balance sheet to an expanding economy to tax reform—bonds of all stripes delivered positive returns this year. Though they dipped into negative territory at times, fixed-income investments quickly bounced back and proved their value by producing income and acting as ballast in investor portfolios. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 2.74% from 2.61% at 2016’s end. On a total return basis, the U.S. bond market has gained 3.4% entering the last day of trading.
We do not expect interest rates to rise substantially in the year to come other than through Federal Reserve action at the short-end of the yield curve. Persistent demand, tepid inflation and cautious investor positioning are likely to keep a lid on how high longer rates will go. Until any of these factors change in a meaningful way, there’s little reason for investors to expect a sizable rise in bond yields in the months ahead.
Taxes and the Economy
Investors continue to digest the new tax law and how it will impact corporate earnings, economic growth and consumer spending. Our take: Lower corporate taxes will boost profits, while companies are likely to bring back money held overseas to pay dividends, buy back stock or acquire other companies—all good signs for the stock market. We also expect most households to pay a lower tax rate than they did last year. But because corporate tax reform is unlikely to lead to renewed investment spending, and since household tax cuts are skewed toward wealthy consumers who have historically saved, not spent, their tax rebates, we expect a muted impact on the broader economy. The one thing we are sure of is that the new tax law is causing certified public accountants to work overtime into the New Year—so maybe there is an immediate economic benefit after all.
Consumers Drive Growth into 2018
Consumers will enter 2018 on a high note. With near-peak employment, wages on the rise, credit readily available, home prices climbing, the market at or near record highs, and tax rates set to drop, that optimism is not misplaced.
Of course, as regular readers know, we prefer to look at what consumers are doing rather than how they’re responding to surveys. If the holiday season is any indication, they’re backing up their cheery sentiment by spending. Retailers reported that holiday sales grew 4.9% from last year, the largest year-over-year increase in holiday sales since 2011.
Because we believe that all of the economic trends that bolstered growth in 2017 are likely to continue to help next year, we expect consumer spending and the overall economy to grow further in 2018.
Markets (and our offices) will be closed Monday in observance of New Year’s Day. Next week, we’ll begin 2018 with key reads on manufacturing, construction spending, car sales, the service sector and various jobs-related reports, including December’s unemployment rate (November’s came in at 4.1%).
All of us at Braver Capital Management thank you for another great year! Your partnership and trust in our risk-aware, disciplined and diversified approach to investing is deeply appreciated. We will be working diligently to provide you with the top-notch investment management and client service you expect and deserve in 2018 and beyond.
Please note: This update was prepared on Friday, December 29, 2017, prior to the market’s close.
This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.
Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be seen as a recommendation to buy, sell or hold any of them.
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