Market Update: Fourth Quarter, 2017

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    Market Update – 4th Quarter 2017

    2017 was quite a remarkable year for stocks! Nearly every corner of the globe experienced strong positive stock returns – large companies, small companies, international developed, emerging markets, and the list goes on.

    In particular, the S&P 500 Index has been on a record-busting tear, experiencing positive total returns every single month in 2017. This is the first time in records going back to 1970 that’s happened. Additionally, these returns were delivered in an exceptionally smooth ride, with the fewest up-or-down return swings of 1% or more since 1965. The biggest single-day drop in 2017 was just under 2%.

    The S&P 500 Index gained 6.1% during the year’s final quarter and overall returned 19.4% in 2017. Small company stocks, as measured by the Wilshire US Small-Cap Index, posted a 3.6% gain over the final three months of the year, to stand at +13.4% for 2017.

    While US stocks did well, foreign stocks did even better. The broad-based EAFE index of companies in developed foreign economies gained 3.9% in the recent quarter, and ended the year up 21.8%. Emerging market stocks of less developed countries, as represented by the EAFE EM index, rose 7.1% in the fourth quarter, giving these stocks a remarkable 34.4% gain for the year.

    Even bonds fared reasonably well in 2017. The US Barclays Aggregate Bond Index gained 3.5%, enough to stay ahead of inflation. Yields on 10-year Treasury bonds, at 2.40%, finished the year slightly lower than they started at 2.45%, but, there are signs that interest rates may finally start moving off of record low levels. The Federal Reserve anticipates raising the Fed funds rate 3-4 times in 2018. And there is reason to believe that economic growth could accelerate in 2018.

    This was a year when investors ignored the dire headlines, North Korean missile threats, investigations of the Trump administration and possible Russian collusion, the president’s wacky antics, devastating hurricanes, and adding yet another $1.5 trillion to the U.S. federal budget deficit over the next ten years, to produce one of the smoothest investment rides in the past century.

    How long can this continue? Unfortunately my crystal ball is away for servicing, but I can tell you this: The S&P 500 is now trading at around 18 times forward earnings, which is above the historical average of 16. Loosely translated, this means you aren’t getting a bargain when you buy stocks today. At the same time, however, we are experiencing low unemployment rates and solid profits for American companies. Last month’s tax cuts, including the corporate tax cut from 35% to 21% will certainly add to those profits. The US economy grew at rate of 3% (annualized) in 2017 and predictions are for that to accelerate this year.

    Interestingly, the psychology of the markets doesn’t match what we traditionally see at market tops: people still seem to be suspicious about how long the market rally will last, unlike the normal buying frenzy that often presages the next sharp downturn. (To see what a market frenzy looks like, are you hearing more about bitcoin than you have in the past?)

    What are we to make of all this? As always, we turn to evidence-based investing, disciplined rebalancing, and your personal investment objectives to guide the way – whether it’s to enlighten us during dark and scary markets, or to offer a clear lens through which to view the recent above-average returns.

    Has the smooth market ascent lulled you into forgetting what it feels like to be afraid? (Remember 2008?) Last year’s market growth has been gratifying indeed. But if your highest-flying holdings have significantly outpaced your planned allocations to them, our rules-based approach tells us when it’s time to get back on target, replacing blind ambition with thoughtful, “buy low, sell high” rebalancing.

    Has the unprecedented run left you a little nervous? When it comes to market returns, there’s plenty of evidence to suggest that nothing this good lasts forever. But is there a right way to respond to this rational concern? Again, your investment objective tells us how and when to rebalance back to target in high-rising markets by shifting a portion of past gains away from market risk, without diminishing your desired exposure to future expected growth.

    In short, whether current markets leave you enthused and excited, fearful and fretting, or a little bit of both, we remain committed to our principles and are sticking to our disciplined strategies for you: (1) applying evidence-based investment theory to your portfolio management, (2) adhering to your personal investment objective as our ongoing road map, and (3) incorporating rules-based rebalancing to help maximize your expected returns while minimizing the market risks involved. No strategy is guaranteed to succeed, but we continue to believe ours is the most practical approach to achieving your financial goals, come what may in 2018.

    On that note, we wish you and yours a healthy, prosperous, and peaceful year ahead. Please let us know how we can help.

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