The SageVest Wealth Management quarterly commentary is now available for year-end 2017. Highlights include:
– 2017 brought prosperity to investors, thanks to continued new stock market highs and low volatility.
– Expectations of tax reform supported growth, and became a late-year Republican victory. The ultimate impacts will be seen in the months and years ahead.
– 2018 offers plenty of continued growth opportunity, with a worthy cautionary note that we’re in the second longest bull market ever, with elevated valuations.
A Profitable Year!
The year of 2017 rewarded investors, particularly equity investors as stock indices around the globe posted handsome returns, generally in double-digit numbers. To add to the good fortune, returns were achieved with extremely low volatility, making 2017 a sweet and steady investment ride.
The year started with countless questions of what the first year of a Trump presidency would mean for the country and for the investment markets. As we approach the one-year mark since inauguration, it’s clear that, bar any dramatic short-term market changes, it has been a productive year from an investment standpoint
As we look forward, there are plenty of opportunities to extend this long bull market cycle, including a strong US and global economy, a healthy job market, strong consumer confidence, US tax reform and a pro-business administration. The primary caveat is that this is already the second longest bull market in history, potentially celebrating its 9th anniversary on March 9, 2018. While we hope for continued growth in 2018, every investor needs to remember that no bull market lasts forever. We explore this and other thoughts in greater detail.
A Reasonably Healthy Global Economy
After several years of disappointing international investment returns, 2017 marked a distinct shift, as international markets led performance figures for most of the year. Years of austerity efforts, combined with European Central Bank actions, brought a significant turnaround in European economies and investment markets. The European populist movement lost steam, and 2017 was largely devoid of drama. The effects of Brexit remain minimal, albeit with a mutation in British economic growth, and even Spain, contending with the Catalonian independence movement, ended the year in positive territory.
Perhaps the most notably positive international aspect of 2017 was the absence of trade wars, which were a distinct concern after President Trump’s extensive campaign rhetoric. He certainly wielded some might, but thankfully didn’t upset any trade apple carts.
The Trickle-Down Effect(s)
The ‘trickle-down effect’ economic theory is founded upon the idea that business and investment tax cuts benefit everyone, largely by stimulating economic growth and jobs through business prosperity. While US tax reform didn’t get signed into law until the tail end of 2017, it was largely anticipated and therefore built into the markets as the year progressed. Stocks, particularly financials, also benefited from the pro-business, lower regulatory environment.
As tax reform moves into its implementation stage, we await the true effects of lower corporate tax rates and significant changes in personal income taxes. On the corporate side of the equation, a lower corporate tax rate has the potential to repatriate overseas corporate earnings, return jobs to the US, promote higher dividend payments, and prompt stock buy-back programs. These effects are yet to be seen, but the outlook is optimistic.
The individual side of the tax equation is far more imbalanced in how it will impact some taxpayers versus others, largely depending upon the number of dependents claimed and the magnitude of deductions previously taken. For some, lower tax rates and higher standard deductions will render tax relief and healthier paychecks. However, the upper middle class is poised to feel additional tax burdens, potentially having a negative effect on discretionary spending. Many people might not realize the ultimate impacts until they file their 2018 tax returns, meaning that the effects of the new tax laws may not become evident until 2019 and beyond. We strongly urge you to review your tax withholding and payment obligations with your tax advisor.
Inflation, Central Banks, And Changes At The Fed
After years of accommodative monetary actions, central banks, notably here and in Europe, are beginning to unwind their balance sheets. Domestically, the US Federal Reserve Board (Fed) actively raised its federal funds rate three times in 2017. Short-term interest rates felt a pretty dramatic uptick from these changes, but longer-term rates actually declined throughout the year, due to low inflation expectations.
As we move into 2018, inflation and central bank changes are worthy of consideration, particularly given the strength of the US job market, potential additional rate hikes, and upcoming changes at the Fed, with the appointment of a new Federal Reserve Chairman, Jerome Powell.
After close to a decade of discussing deflation versus inflation, it’s difficult for many to envision the impacts of an inflationary environment. There are still plenty of variables helping to contain inflation, but strength in the economy, tax changes, the potential for infrastructure spending, deficit levels and the tightest job market in over a decade present the opportunity for interest rates to rise in the foreseeable future. Inflation can be healthy, for the economy and investment markets, as long as it remains in check.
Every central bank is facing a difficult struggle as we enter 2018. They need to find the right balance between welcoming back inflation versus opening their welcoming arms too wide and allowing inflation to derail economic prosperity.
Valuations And Risk
Outside of inflation, and the menace of North Korea, stock markets too are exhibiting increased risk through higher than average valuations. While stocks in general still aren’t at extreme valuation levels, there are investment pockets and developments that are worthy of note.
Technology stocks led the markets in 2017, particularly the FANG stocks (Facebook, Amazon, Netflix and Google). Extreme performance advanced the representation of technology sector close to 24% of the S&P 500 as of year-end, with the closest trailing sector being financials at around 15%. Price-to-earnings ratios are becoming elevated and performance is becoming concentrated. While this has happened a number of times throughout history without derailing the markets, it is a warning sign. So too is a potential aura of excess risk-taking and investment complacency after an upswing in the markets over such an extended period, particularly the past twelve months of extremely smooth sailing.
We’re certainly not saying that the party’s over. There are plenty of positive factors that could fuel this growth engine longer, especially if infrastructure spending initiatives discussed for 2018 become a reality. We are, however, advising investors that investment prices are lofty, meaning that no one is buying stocks at discounted prices.
Looking Forward
As we look forward, we distinctly see signs for continued growth, while recognizing that we’re in a mature market cycle and that no bull market lasts forever. SageVest Wealth Management encourages investors to remain invested for the long-term. This includes exposure to stocks that may fuel prosperity throughout 2018, as well as capital preservation investments to protect on the downside, allowing you to sustain your lifestyle, sleep well at night, and buy on market dips when they present themselves.
Wishing a happy, healthy and prosperous 2018 to all!
