2017 in Review and 2018 Forward

Worry, Worry, Worry and nothing to show for it!

Last year will go down as a year where I worried the most about the financial markets and in hindsight, will have to wonder why I bothered. From January to December, almost every day was better than the day before. Worrying about a modest pullback seemed prudent given we are in an aging bull market. Apparently, it was not prudent. I will refrain from listing the whole litany of crazy things that happened in 2017. Suffice it to say there was plenty of international, political and business uncertainty that would have caused a more normal stock market to take a pause. Instead, this market had a great year (proof yet again of why we do not try to time the markets). I will recap the good news below and then give you a brief forecast for 2018. Hint: it does not involve worrying…too much.

The Facts for 2017

It turns out that 2017 was a great year to be a diversified, long-term investor. Some of the best performing asset categories were US stocks. For the year, the S&P 500 Index (large stocks) was up 21.82% in total return (assuming you reinvested your dividends back into the index). Mid-sized stocks, as represented by the S&P 400 Index, were up 18.50% for the period. Small-cap stocks, as represented by the Russell 2000 Index, finished up 14.63%. I personally love the symmetry in that the performance of large, medium and small US stocks was in line with their categorization. After at least two years of false hope, international stocks did even better than US stocks, helping to add value to globally diversified portfolios. Large developed international stocks, as represented by the MSCI EAFE Index, were up 25.69% for 2017 and emerging markets stocks, as represented by the MSCI EM Index, were up a phenomenal 37.51%. Most categories of bonds had a decent year of returns, especially considering several rate hikes in 2017 and with nominal rates being so low. The most widely quoted index of US bond market performance, the Bloomberg Barclays US Aggregate Index, was up 3.54% for the year. Blend all that together in a balanced portfolio and most investors saw solid double digit returns for 2017.

What’s Ahead for 2018?

For observant readers of these year-end reviews and forecasts, you will recall that I often look back to my forecast from the prior year and see what I got right or wrong. Last year, I had two major predictions and got one very wrong and the other mostly correct. My wrong call (thankfully) was that I thought 2017 would be a very volatile stock market. I specifically thought we would witness a pullback in the first half of the year. The good news for all of us was the market had virtually no downside volatility last year and it trended up for the entire year. My second forecast was that Washington would have a messy year when it came time to quit talking and govern after the elections. Regardless of your political affiliation, most everyone would agree this was a year of fractured government. The president did not succeed in trying to reform the Affordable Care Act but did pass some promised tax reform. In between, the number of appointees, special committees and scandals from both parties were less than inspiring.

So, for 2018, let’s see if I can do better than 50/50. My first prediction is good news. Based on many different economic forecasts and statistical history, the year after a strong year in the financial markets is typically another good year. Most forecasters and models are predicting mid-to-high single-digit returns for the stock markets next year. This does not mean it will come in a straight line with no sell-offs (it is still my nature to worry), but 2018 should be a good year for investors. My second prediction is that the reduction in the corporate tax rate and regulations will continue to foster business optimism. Economists have a term they call “animal spirits,” a nonquantifiable sense of optimism among capitalists on when it is a great time to grow and build businesses. It seems like we are now in one of those times and the capital spending and entrepreneurial spirit flowing through the economy should give us good economic momentum in 2018. My final prediction is that 2018 will be the year that cryptocurrencies (like Bitcoin) break out one way or the other. I am not a believer in cryptocurrencies and I think that a big failure will scare many others to desert this latest gold rush/tulip bulb craze. However, if it does turn out to be a legitimate way to transact in the future, it could gain a broader following if it survives the year with no significant crash in value.

Well, by making three predictions I have guaranteed that I will have to do better or worse than last year’s 50/50 success rate. More importantly, your success rate has benefited from our long-term commitment to staying invested and staying diversified. You can rest assured we will continue to do so in 2018. Keep warm, Mike.

Mike Kauffelt, CFA
Co-CIO, Bill Few Associates, Inc.

All data from Factset, Morningstar and The Wall Street Journal