Market Pulse: Big year for stocks in 2017
January 4, 2018
Usually, the safest prediction one can make as a year begins is that stocks will be volatile.
For 2017, that prediction was wrong. There were only two occasions where the S&P 500 retreated 2 percent and it never fell 3 percent.
We are in the longest period in history without a 3-percent pullback. The year's worst performing ETFs were those tied to the VIX, a measure of market volatility.
Stocks were very strong in 2017, but the Dow and S&P 500 overstated the gains. Those market measures were stronger than the S&P Large-Cap Value Index (up 13 percent), S&P 400 Mid-Cap Index (up 14 percent), and the Russell 2000 Small-Cap Index (up 13 percent).
The anticipation of corporate tax cuts was a constant tailwind for stocks. The tax bill is front-loaded and that will help stocks in early in 2018.
JPMorgan said the market reflects only half the impact of the tax cuts, which will lower the cost of capital (a key) and make United States and foreign businesses increasingly look to expand here. By itself, the corporate tax cut will boost S&P earnings by 7-10 percent.
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In 2017, the unemployment rate fell to 4.1 percent, the lowest level in 17 years. I recall when a jobless reading of 5 percent meant the economy had reached "full employment" and few economists thought we'd ever get there.
Now we're at 4.1 percent and the unemployment rate in some sectors (manufacturing, for one) has never been so low. Close to 2 million jobs were created in 2017 and, while final numbers aren't in, the economy grew close to 3 percent. Thanks to a business-friendly environment, the U.S. economy is gaining momentum.
International markets are also improving. In 2014-15, U.S. corporate profits coming from the rest of the world fell about 3 percent annually. In 2016-17, they grew 7.5 percent. Economies around the globe are in synch in a way we haven't seen in a long time. Goldman Sachs and Barclay's expect the global economy to grow by 4 percent.
In the simplest terms, stocks are a bet on future earnings, not current profits and certainly not trailing earnings. Correctly anticipate future earnings and you'll do well.
Growing optimism about corporate earnings and the economy explains a lot about this bull market. It is more likely that earnings will be revised higher, not lower, and the odds of a recession remain very low.
The greater threat is that interest rates will rise by more than a little due to an improving economy. That's not what we expect, but we'll keep watch. In the meantime, the "there is no alternative" tailwind remains intact. We remain bullish.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555.Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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