2017: A Record Year
Investors are in many ways historians. Each year we package up the twelve months from January to December in a synopsis of events, themes, and lessons, hoping to learn from the past, in an effort to make better decisions in the future. These events and lessons are critical because, as the saying goes, “history doesn’t repeat itself, but it rhymes” and investing is always an exercise in uncertainty. We always try to make the best decisions with the information available today, because there is never a script for the coming year or years. 2017 will be remembered by Bridgeworth as a very positive and “record year*” in many ways and is perhaps one that few would have predicted. It stands in contrast to 2016, 2015, and 2014. A quick look back at these years will highlight that the bull market climb was not something that all felt was destined to continue in 2017, at least not in such a smooth and uniform fashion, especially with such a tenuous geopolitical landscape.
Source: Blackrock Benchmark Returns Comparison December 2017/ Bloomberg
For the first time in 90 YEARS, the S&P 500* posted positive returns in every month, ending the year up 21.83%. Four other times in history, we have come close with 11 months positive. Now, in terms of total return, 21.83% only ranks as the 8th best, but I will gladly take it. Since the market low on March 9, 2009, the S&P 500 has risen 378%, which is an average return of 19.4% over these last 9 years. A couple of takeaways: First, starting in 2017, we were at “all-time highs**” and in the 8th year of a bull market. MANY prognosticators enjoy the sport of calling market tops. Once again, however, these folks were shown that it’s not a great game if you wish to maintain your credibility. The S&P 500 has been up in 40 of the last 50 years (80% of the time), so calling a down year has been a loser’s game. Secondly, we must remember that what we saw in 2017 IS unusual. Casual market observers often forget that the stock market is rarely positive month after month. In fact, even in bull markets, it is not uncommon to have opportunities to think that the market is headed south, because they may be turning that way at the moment. As for why 2017 was so solidly positive, economic growth at home and around the globe accelerated. The 4th quarter ended with GDP growth of 3.2%, the second quarter in a row with over 3% growth, a number above the 2.2% average growth we have experienced during this economic expansion. Corporate earnings growth, improving overseas economies, patient central banks, and apparent optimism about tax reform and deregulation have helped to create positive momentum that has swept across almost every sector. Oil (WTI) jumped 16% and ended the year above $60 a barrel (a level not seen since 6/24/2015) amid improving global growth and OPEC/Russian extended production cuts. Large companies represented by the S&P 500 returned 21.83%, outpacing smaller companies (Russell 2000) which returned 14.65%. Small companies had returned a remarkable 21.31% in 2016 (they simply got most of their return at the end of last year). Valuations are creeping to more expensive levels, with the Price/Earnings ratio of the S&P 500 at 18.2, based on forward earnings projections, but economic fundamentals are supportive and markets continue to trend higher so far in 2018.
The phenomenon of stringing positive monthly returns was not only a US occurrence. The FTSE All-World Index (ex-US stocks) also posted positive returns in all 12 months. For many international-weary investors, this was really welcome news. Developed international stock indices had not outperformed their US counterparts since 2012. For those investors in hopes that cheaper international stock valuations might result in higher returns, the wait has been a long one, but improving economic data throughout the world and improving corporate profits provided a very robust market in ’17. Eurozone GDP growth has continued to accelerate, unemployment (which still stands twice the rate of the US) continues to drop, loan demand is strong, and manufacturing growth is very strong. The European fundamentals are appealing, leading to earnings that are growing rapidly; however, unlike in the US, the European market levels are still not back to their 2008 highs. While US valuations have climbed above their historical 25-year averages, European valuations have not, making for a continued attractive investment for many. The EAFE Index representing developed International ended the year up 25.03%.***
I often describe returns in stocks as “lumpy”, meaning that they don’t come evenly throughout the year or even throughout the years. This characteristic is certainly true of all stocks but has been more true of emerging markets. Emerging markets had signs of life in 2016 (returning 11.19%), which turned into tremendous profit growth in 2017 and, combined with the dollar weakening against many global currencies, resulted in remarkable total returns. The Emerging Markets Index (representing countries like China, India, Korea, Mexico…) ended the year up 37.28%. It is hard to be patient for a year, and two or three can often feel like an eternity; however, in general, investors who are able to stay disciplined are those that sometimes capture the largest returns….and a 37.28% return can make up for what felt like a lot of lost time.
The bad track record of stock market timers is made to look better when compared to those who have been calling for the bond market bear to arrive. As you may know, when interest rates go up, bond prices go down, but what is often forgotten is that the Federal Reserve only controls the rate on very short-term bonds. Market forces may do something very different with the rest of the outstanding bonds with longer maturities. 2017 was marked by three 0.25% Fed Fund interest rate increases, taking the rate from 0.75% up to 1.50%; however, the yield on the 10-year Treasury bond ended at 2.41%, just 0.03% lower than the 2.44% it ended in 2016. To this point, global demand for Treasuries and low inflation has kept a lid on rates thus far. The Federal Reserve has projected three additional rate increases in 2018; how the bond market responds is likely fairly subdued if fundamentals stay as they are today. The U.S. Aggregate Bond index returned 3.54%. The High Yield Index returned 6.32% amid great corporate earnings. We continue to preach the role of and need for bonds as a part of a balanced portfolio. One day this important asset class, with its low-volatility/boring persona, is going to be very important; we just don’t know when that might be. Like your seatbelt in your car, non-use should not render it useless.
Put Away Your Crystal Ball
The emotional pull to take data and form dogmatic prognostications about what can, will, or won’t happen in the investing world is undeniable. Mix into this cocktail some politics, anxiety, greed, and every other human emotion and it is easy to understand why so many individual investors have such strong opinions about the unknowable future. Every year, we are humbled to remember that we must rely on some basic investment principles that are based not on emotion or headlines, but on economics and math and that demand patience. 2017 was a great year, and we are thankful when wealth is grown for our clients. Our job in 2018 and future years is to remain diligent to our process as we continue to help our clients strive towards their goals, while always keeping an eye on risk. We appreciate your trust in us as a steward of your precious capital.
Here’s to a Prosperous New Year!
*By the Numbers Jan 2, 2018
** Blackrock Benchmark Returns Comparison Dec 2016
*** Blackrock Benchmark Returns Comparison Dec 2017
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of January 15, 2018, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Bridgeworth, LLC to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks.
Investing in stock includes numerous specific risks including the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market.
International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments.
The two main risks related to fixed income investing are interest rate risk and credit risk. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments.
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