New Year's is a time many of us reflect on our lives, set new
goals, and pursue new opportunities. We hope your 2018 is
your best year yet!
If you or anyone close to you is looking to evaluate new
financial goals or reevaluate older financial goals,
Fortem Financial is here to help.
2017 was an outstanding year for stocks; the S&P 500? Index delivered gains in eleven out of twelve months, a feat previously accomplished only in 1958 and 2006. Investors seemed un-phased by geopolitical events, such as North Korea, a record hurricane season, and a highly partisan political environment. A synchronized upswing in global economic growth provided a supportive backdrop for stocks; but also, tax reform was a key driver during the second half of 2017. Information Technology led all other sectors; the popular “FAANG” group of stocks soared an average 48.7% for the year. Financials also performed well as the Federal Reserve raised interest rates three times in 2017; the Trump administration’s deregulatory agenda also buoyed sentiment for the sector. Energy was the worst performing sector despite the recovery of oil prices to their highest levels since 2015. Looking ahead to 2018, though, signs continue to point to a steady increase in drilling activity, led by shale. Notably, small cap value stocks underperformed during the year; the Russell 2000? Value Index returned just 5.8%. In contrast, the NASDAQ 100? Index, which includes the largest technology stocks, gained 31.5%. The performance differential is the largest since 2009 and underscores investor preference for growth-oriented strategies over value. Technology could begin to lag if investors take profits and rotate funds into other, less-heralded, areas of the market.
Despite three interest rate hikes Last year, the U.S. dollar actually weakened in 2017. Entering the year, some economists voiced concerns that the continued rise in the dollar could suppress economic growth. Instead, improving conditions overseas buoyed the value of foreign currencies which more than offset the dollar’s strength. Longer-term interest rates remained subdued; the yield on the 10-year U.S. Treasury Note, which ended 2016 at 2.45%, fell to a low of 2.05% and rose to 2.62% before ending the year at 2.40%. Similarly, the yield on the 30-year U.S. Treasury Bond which ended 2016 at 3.06%, ranged between 2.66% to 3.20% before ending the year at 2.74%. These downward trends in long-term rates, coupled with the rise in short-term interest rates, led to a flattening of the “yield curve.” A flattening yield curve often indicates expectations for slower economic growth; but, in this case, the curve may reflect predictions for continued modest inflation. Rates of inflation, though, may surprise to the upside in 2018. Corporate tax reform will provide a cash windfall to companies, some portion of which will likely be used to hire workers and raise wages for existing employees. If so, longer-term interest rates may rise from their historic lows. The extent and pace of rate increases would have bearing on the stock market: if rates rise steadily and predictably, the effect should be minimal; but, if rates rise more quickly than expected, stock prices could fall.
Still, the fundamental outlook for stocks remains positive; all of the major developed economies are expected to grow next year. And, emerging market economies, such as China and India, continue to provide an important growth engine for the global economy. Supportive policies, such as tax reform and a potential infrastructure spending plan, could sustain the market’s bullish trend. On the other hand, Federal Reserve monetary policy, unforeseen global events, and the upcoming mid-term elections could trigger a market correction. A repeat of 2017’s consistently positive returns is unlikely in 2018 as investors face a new set of opportunities and challenges. Investors will turn towards fourth quarter earnings season and, specifically, management guidance regarding the implications of tax reform; these may include higher earnings projections, increased investments in equipment and facilities, new expansion plans, and acquisitions.
* Pacific Global Management
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Market Week
Click here to download Ten Predictions 2018: From nearly perfect to less perfect
Last Week's Headlines
1. The international trade deficit was $69.7 billion in November, up $1.6 billion, or 2.3%, from $68.1 billion in October. Exports of goods for November were $133.7 billion, $3.8 billion more than October exports. Imports of goods for November were $203.4 billion, $5.4 billion more than October imports.
2. The Conference Board Consumer Confidence Index® fell to 122.1 in December, down from 128.6 in November. The Present Situation Index, which measures consumers' views on the present state of the economy, increased from 154.9 to 156.6, although the Expectations Index declined from 111.0 in November to 99.1 in December.
3. In the week ended December 23, initial claims for unemployment insurance was 245,000, unchanged from the previous week's level. The advance insured unemployment rate remained 1.4%. The advance number of those receiving unemployment insurance benefits during the week ended December 16 was 1,943,000, an increase of 7,000 from the previous week's level, which was revised up 4,000.
Eye on the Week Ahead
The first week of 2018 should see trading pick up. The December 2017 employment report is out this Friday, which could reveal a slight drop in the unemployment rate.
