It’s not a secret that we’re coming off of a great year for the stock markets. The Dow Jones Industrial Average was up 25%, the S&P 500 19.5%, and he tech heavy NASDAQ saw 28% gains in 2017i1. That’s the 21st best year of the 118 recorded since 19002. And it’s not just here. Japan, Europe, Emerging Markets and the All Country World Index were up just as much as the Dow. But if anything proves the old adage “What have you done for me lately”, it’s the stock market.
So, what’s ahead for investors in 2018? Most prognosticators think it’s more of the same but less. The factors that drove the markets higher in 2017 are still in place, but probably won’t have the same impact as last year. The global economy is the strongest in years, corporate earnings are outstanding, there’s full employment for the first time since 2007, and the new tax cuts that have been aimed at our corporations specifically, will benefit stocks as well.
Now, you need to be careful about blindly trusting market analysts. The consensus prediction of 16 major Wall Street firms finds the S&P 500 only up 6.75%3 for 2018. Considering the S&P was up 2.60%4 last week you would hope it makes it. But remember last year the analysts predicted a 5.5% S&P gain for 2017 and they were off by over 14%5
If you don’t take the word of the prognosticators, you might look at historical returns. The Stock Traders Almanac’s research has uncovered what they call the January Barometer, and it found that so goes the market in January, so it goes for the year. Since 1950, the Barometer has been right 87%6 of the time. If you can’t wait for the end of January, you can use their January Effect. The Effect looks at the markets close on the 5th trading day of the year and if the markets are up those five days, they will be end the year up 83.3%7 of the time. The 5th trading day was last Monday and found both the S&P and the Dow up strongly for the year. And an 83.3% success ratio is great in the investing world.
One other thing that the Almanac looks at are presidential cycles and their influence on the markets. Usually, the first two years of a president’s term are abysmal for stocks, and 85%8 of market gains are made in the last two years. And it’s pretty easily explained. Incumbent administrations do everything in their power to stay in power. That means making the economy look good at election time and putting off unpopular decisions until after the votes are counted.
There are a few negatives for the market however. One, stocks are expensive. The Shiller Cyclically Adjusted P/E (CAPE) Ratio; which is based on inflation adjusted earnings for the last ten years, is at the second highest level ever9. Yet even Yale economist Robert Shiller himself tells us the CAPE works best on long term returns, not short -term swings. While the current level of CAPE suggests the next ten years will be rough, it doesn’t tell us when to expect a serious decline.
Another area of concern is that the Bull market is long in the tooth. Starting in March 2009, this is the second longest Bull in history10. But Bull markets don’t die of old age and they don’t die because they’re expensive. Their departure is usually the result of downturn in the economy, a significant rise in interest rates or an outside shock to the market. Over the course of 2018, the economy might slow but not dramatically. The Fed is planning on raising rates three times by a quarter percent each, but that still means a historically low 2-2.25%11. Then that leaves an outside shock like a North Korea incident of which the odds are low.
So, while I might take some money off the table, I’d stay invested. Sectors that could outperform are Trump Trades. Financials, especially banks, will benefit from the tax cuts. The Materials and Energy sectors will do well if infrastructure spending takes hold. The Technology and Consumer Discretionary12 sectors have led the markets for the last five years and could again.
And remember, a great year is followed by a good year most of the time.
Until the next time, we’ll watch your money.
Nicholas W. Bertell ChFC®, AIF®
Financial Advisor / Accredited Investment Fiduciary
Redwood Coast Financial Partners, an independent firm with securities offered through Summit Brokerage Services Inc., member FINRA/SIPC. Advisory Services offered Through Summit Financial Group Inc., a Registered Investment Advisor. Advisory services also offered separately through Redwood Coast Financial Partners, a Registered Investment Advisor. All information herein has been prepared solely for informational purposes, and is not an offer to buy or sell securities. The information in this article is not intended as tax or legal advice. Certain Statements contained within are forward looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. The Standard & Poor’s 500 index are an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index.
1.Wall Street Journal, December 30, 2017
2.The Bespoke Report, Everything Investors Must Know About the Markets in 2018, Paul Hickey et.al.
4. Wall Street Journal, January 6, 2018
5. The Bespoke Report, Everything Investors Must Know About the Markets in 2018, Paul Hickey et.al.
6. Stock Traders Almanac 2018, Jeffrey A. Hirsch & Yale Hirsch, Wiley
10 The Bespoke Report, Everything Investors Must Know About the Markets in 2018, Paul Hickey et.al.