Happy New Year!! I hope each of you had a wonderful holiday season and that 2018 is off to a great start (albeit a very cold one here in NC). As we begin the new year, it seems like a good time to share some thoughts about the market in 2017 and what we may be able to expect going forward.

Beyond the fact that the market performed quite well in 2017 (S&P 500 up almost 22%, including dividends), 2017 was remarkable from a number of other perspectives:

  • Market volatility was below average in 2017, and was well-below long-term averages for much of the year, this despite the fact that North Korea was firing missiles over Japan, hurricanes were tearing through Texas, Puerto Rico and Florida and the din coming from Washington was as loud as ever.  In 2010 and 2013, events such as these sent the market plummeting and kept investors on edge.  In 2017, the market seemed determined to focus on corporate profits and the overall economy. This has been a welcome change and one that I hope continues.
  • Correlation (the tendency of stocks to move up or down in lockstep) fell dramatically in 2017. In the years after the financial crisis, it didn’t seem to matter whether a company was performing well or not, if the market was going down, then everything was going down. That was frustrating for investors because it made the markets seem irrational. But in 2017, correlations fell and at least for now, companies that beat expectations are rewarded while those that miss are punished….that makes sense.
  • Economic activity continued to improve in 2017 and the Federal Reserve continued to move toward more normal monetary policies.  While that means an increase in interest rates, the fact that interest rates are still well-below long-term averages suggests that Fed tightening is not likely to derail the economy or trigger a recession any time soon.
  • While the Republicans in Congress couldn’t accomplish all they sought out to at the beginning of 2017, they were able to deliver a Tax Reform package.  For me (and for the markets I believe) the changes to the personal tax side of the equation are not particularly important. While some individuals will see a reduction in taxes, others will not, and by itself, I wouldn’t expect the changes to result in significant increases in economic activity. However, the corporate side of the bill is VERY important and will likely result in increased economic activity. We are already seeing companies making plans based on the new law – everything from increasing minimum wages to bonuses for low-level employees (and those bonuses and increases in minimum wage are not chump change for lower and middle income earners….if you are working full-time for a company making $13.50/hour and your pay is now $15.00/hour, you just received a $3,000 bump in your salary).  Companies are also making arrangements to bring back some of the $2.5 Trillion in cash stuck overseas. What will they do with that cash? Probably a lot of different things, but just about anything that they do, should benefit shareholders (you) – whether through share-buybacks, increases in dividends, or investment in new growth opportunities for the company.  We’ll have to wait to see exactly how things play out, but I firmly believe that we’ll see increased economic activity as a result of the new corporate tax structure.

So what do we do going forward?

  • More of the same – continue to focus on high-quality companies to protect from an unforeseen shock and take advantage of opportunities to add some holdings that will allow us to benefit from an increase in economic activity.  That worked pretty well in 2017 and I expect it to continue in 2018.
  • Don’t be surprised if we get a market pullback (3-5%) or a correction (10%). On average, the market pulls back 2-3 times per year and corrects once per year.  We got neither in 2017, so we’ll just have to wait to see how 2018 plays out.  If we get such a move and it is not accompanied by a fundamental shift in the economy, corporate profit potential, or world peace, then we should be able to weather the storm without making a lot of adjustments.
  • Will the market give us 22% in 2018? I don’t know, but as always, we’ll continue to watch corporate earnings. If we continue to see growth, then the market should at least follow along.  And no, I don’t think we’re in “bubble territory” – as long as we continue to see increases in corporate profits.

Let me know if you have questions or want to chat. Stay warm!!