Review
2017 was a continuation of one of the longest equity bull markets in US history. The year ended with a return in the S&P 500 of 19.42%, which was one of the best years of this multi-year run. The fourth quarter of 2017 provided returns in the S&P 500 of 6% on the momentum provided by the corporate and individual tax reform. A rare combination of global economic growth, accommodative economic policies, record corporate earnings and tame inflation provided the recipe for a strong year for stocks and a bull run that continues to be one for the record books.
Internationally, economic recovery and growth continued and reflected in equity prices as foreign markets even tended to outperform the strong US markets. With the US recovery more mature than that internationally, especially the Eurozone, the trend is likely to continue.
Outlook
I have held off writing this commentary until returning from the Inside ETF Conference in Florida. The conference brings together some of the brightest advisors, economists and providers in the country. I was very interested in gauging the thoughts and outlooks from the attendees, panels and presenters. Coming off one of the best years in the markets and one of the strongest bull markets of all-time, the primary questions at the conference were, “When is this run going to end?” and “What will cause it”? My pre-conference answer to those questions was likely towards the end of 2018 or early 2019 with the cause being inflation. Surprisingly, most of the economists and panelists were even more positive. The majority of the discussion focused on a positive outlook for the US equity markets into 2019/2020.
There are a number of key factors providing the backbone for a positive outlook. The primary factor is a rare occurrence of coordinated worldwide economic growth. In addition to worldwide growth, the policies of the four major economies of the US, Eurozone, Japan and China are all very accommodating which is expected to continue. In addition, the recently passed US tax package should be a catalyst to US companies. The assumption of a continued accommodative worldwide economic policy is based on low inflationary pressure and few signs that inflation will grow fast enough to warrant a change in policy in the near term. The last recurring positive factor was the lack of a geo-political event. Yes, there is tension between the US and North Korea, but no real sign of an actual military conflict.
With all signs pointing to continued market prosperity, when does it end? Let’s look to relevant common events that cause markets to decline. First, hyper-inflation would cause economic policies to become less accommodative which could result in interest rates being raised rapidly. With little signs of inflation, the concern is not immediate and can be adjusted for when signs become prevalent. Second, and most interesting to me, is economic normalization of un-conventional policies. Due to the financial crisis years ago, the balance sheets of the US, Eurozone, Japanese and Chinese have taken on massive amounts of debt to prevent a worldwide crisis. What will happen when all four begin to unwind that debt? There is uncertainty as it has never happened before. Another concern is any abrupt changes in foreign trade patterns, primarily with China. If there is a halt in trade, the US would suffer, and it could cause a reduction in economic growth leading to the end of the positive economic cycle. Finally, the one that appeared to have concerned the conference presenters the most, is a geo-political event. The primarily concern is that an event could come without warning preventing advance portfolio adjustments.
To summarize, 2018 should continue to be a positive environment for the stock markets. I do believe we will see an increase in volatility as the year progresses and US markets will revert to a more normalized expected return.
Equities
From a portfolio standpoint, we continue with our stance that international markets are undervalued compared to US markets. However, we still believe that US markets will be positive based on positive fundamentals and the new US tax policy. We do not see signs of recessionary conditions in the US that would cause a change in our current opinion.
Fixed Income
We maintain our stance on the potential for increasing interest rates in the US. It is prudent being on the shorter side of duration, while seeking opportunities for yield in areas outside of treasury bonds or with higher yielding debt. We continue to believe a portion of the portfolio should be in emerging market debt which provides not only diversification outside of the US, but also, quality yield.
Alternatives
With economies around the world growing and our primary concern inflation, we believe that the addition of commodities to our portfolios will provide opportunities for return and a hedge against inflation.
As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.
Jason M. Vavra, CPA, PFS
Email: jvavra@vcm-wealth.com
Website: www.vcm-wealth.com
Twitter: @VavCap
Disclaimer
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.
