Happy New Year!
Well – 2017 went by way too quickly, but what a year it was! We started out the year with a new President, a lot of uncertainty, but also a lot of optimism. But – let me say this – not many expected how good the year would turn out!
The major averages turned in their best performance since 2013 with the Dow having 71 record closes and the NASDAQ 72. Traders and investors came into January with high hopes out of Washington for healthcare reform, tax reform and deregulation and it showed in the major averages – the Dow up 25%, the S&P 500 by 23%, the Russell 2000 up better than 15% and the NASDAQ turned in an astounding 29% return. It wasn’t just here in the U.S. that stocks soared – in fact, U.S. stocks underperformed the global markets. The emerging market (EEM) was up 34%, China (FXI) 33%, Germany (EWG) 25%, just to name a few.
Think back at all that could have rolled the markets; Hurricanes/Fires, saber rattling from North Korea, Russian meddling, trouble in the Middle East, election surprises in Germany, Brexit, yet nothing could stand in the way of the markets. Besides an 18-hour bear market in May, we saw virtually no volatility. Note – In 2017 the S&P 500 did not have a single monthly decline and has now risen for 14 months in a row. This has never happened before.
In the world of stocks, it was all about earnings growth. We saw companies not only growing their bottom lines, but the top lines were also improving at the fastest pace in years -but, not everybody.
One of the biggest stories of the year was the retail apocalypse. The all-time record for the number of retail store closings in the U.S. was absolutely shattered in 2017. According to the latest figures, a total of 6,985 store locations were shut down last year, and we are expected to break the record again in 2018. On a related note, we learned a new phrase in 2017 – “Amazoned”, if you have been reading my updates, you know the story.
As far as sector performance, the best performing sectors were technology, materials and financials. The worst performing sectors were energy, telecom and real estate.
While we had plenty of distractions, one that many had feared would disrupt the markets (the FED), in fact did not. Of course they raised interest rates 3 times in 2017, but with the economy chugging along, it was a non-event. The biggest news out of the Federal Reserve was that the President was going to replace FED Chair Yellen at the end of her term.
Another surprise for the year was what U.S. Treasury yields did. Most analysts expected we would be in a “rising interest rate environment” in 2017, the FED is going to be raising rates. We will give them credit for being part right. While yields on the 2-year U.S. Treasury rose to the highest level since 2008, the all-important 10-year yield actually fell 3 basis points from where we started the year and that created the flattest yield curve in years, sparking recessionary fears, but recession was nowhere to be found.
The economy was picking up steam as the year went along, not losing it. We did hit a soft patch in the summer, but a lot of that was related to the hurricanes and fires, transitory as they call it (it won’t last). GDP growth went from below 1% for the first quarter to well over 3% for Q3 (Q4 isn’t out yet). Jobs growth exploded higher and we finished the year with just 4.1% unemployment. Inflation in 2017 was almost non-existent, except with fuel prices being impacted by the hurricanes. The housing market also did well, the biggest challenge it faces is the lack of homes to sell and the lack of labor to build new ones.
So, as we head into 2018 here are my thoughts and plan of action.
First I want to point out that 2017’s returns were above average (by about triple) and unlikely to represent an average annual return going forward. I would also point out that we don’t know what the New Year will bring; we will focus instead on the durability of what we’re doing.
Here are a few things on my radar for 2018:
- Is there still room to run for synchronized global growth?
- Has earnings growth peaked or is there still more room for earnings to grow.
- Growth verse value – Will growth stocks keep charging ahead of the value counterparts or will 2018 bring the return of the value plays.
- Inflation – will we finally see inflation rear its ugly head?
- The FED – how many times will we see them raise rates and what impact it has on stocks.
- U.S. politics.
- Geopolitics – Take your pick, North Korea, Iran, Syria, Russia or anywhere in the Middle East could spell trouble for stocks.
We’ll be monitoring the markets and will keep you posted, and let’s make it a great year.
Todd Day, Portfolio Manager
Horizon Financial Services, LLC
January 4, 2018
