As we look forward to 2018, let us reflect on how remarkable the last twelve months were for the major market indices. Contrary to the usual roller-coaster ride we experience with stocks, 2017 was an amazingly smooth journey to new all-time highs. The S&P 500 was so consistent that the index finished every month of the calendar year with a positive total return, a historical feat that has never happened before. Furthermore, these results were not isolated to just the U.S., as developed international and emerging markets also performed extremely well. In 2017, the S&P 500 finished up +21.8%, while developed international (MSCI EFAE Index) and emerging markets (MSCI Emerging Markets Index) surged +25.0% and +37.2%, respectively.
The recent tax bill helps businesses more than individuals, as reducing the corporate tax rate from 35% to 21% will help American companies invest more at home and repatriate money stashed abroad. Businesses looking to expand or increase productivity will now have more cash on hand, which could benefit capital goods sectors like technology, industrials, and materials. Thus, the tax plan should boost economic growth in the near-term and may provide some rocket fuel for the stock prices of companies who pay near the maximum rate.
What Should We Expect in the New Year?
Nine years into a bull market run, it’s easy to understand why some people believe that stocks might be running out of gas. Although equity prices are at the higher-end of historical valuations, economic data remains healthy and is expected to strengthen into the first half of 2018 as the effects of the new tax code begin to be realized. Supplement this with a muted inflationary environment and you have a set of conditions that historically have been positive for stocks. We maintain that while valuations do matter, elevated valuation alone is not catalyst for a market selloff. Instead of trying to call a market top based solely on one factor like valuations, we constantly map and measure economic data and then respond accordingly to what’s observed.
Economic growth, stock prices, and optimism are running hot with no signs of slowing down in the next few months. The hurdles will be higher this year, which could make for a bumpy ride. While tax reform should provide a boost, we will be prudently watching the leading economic indicators for signs of confirmation.
How Can We Help?
At GGM, aligning your investments with the prevailing economic environment is just one of the ways we strive to add value to your portfolio. If you are concerned about whether your investments are primed for the current market and allocated to meet your objectives, we recommend our complimentary portfolio checkup. Contact us today!