Broker Check

2017 Year End Report

 

January 19, 2018


2017 was another banner year, albeit far from the best.  While, with a total return of 19.4%, 2017 does not even make the top 10 list for annual performance records, nevertheless, in the words of one of those talking heads on CNBC, it “was the kind of year you can’t afford to miss”.  Furthermore, after a fairly tepid “Santa Claus Rally” at year end, 2018 so far (only two weeks in, admittedly) is continuing the trend.

 

The current Bull Market dates to March 9, 2009 when the S&P 500 index[1] hit an intra-day low of 666 (an ominous number, that) and closed the day at 676.   Aside from a roughly 12.5% correction in 2011, we have been in a relentless uptrend since then.  We closed 2017 at 2673.   I will caution you against simply comparing your own results to this or any index since prudent asset allocation and personal goals, risk tolerance and circumstances will skew the performance for each of us in individual directions.  This has been a truly remarkable journey though that has benefited the retirement hopes for most of us in ways that few if any would have thought possible on that dark and depressing afternoon in March of 2009.

 

I think it would be overly optimistic to expect yet another year of double-digit returns.  Nevertheless, there is very little to suggest that the party is winding down.  All of the fundamentals we commonly look at – unemployment at 4.1%, inflation hovering at or under 2% and stable, interest rates stubbornly at historic lows, measures of corporate earnings and profitability – are all positive, significantly so, and you can add a business-friendly administration in Washington to the mix.  Finally the tax reform bill (more on this later) should be beneficial to business prospects and to consumers as well, both positive for the economy and therefore for stock prices.

 

The only thing that gives me pause right now is counter-intuitive.  The collective investor outlook is remarkably positive, alarmingly so, and this specific indicator is problematic.  You have to look long and hard, you have to listen intently, to hear a negative word, and even those that do raise concerns, seem to be working on the assumption that “it has to end sometime, what if it’s tomorrow?” Throughout this remarkable market trend, the nay-sayers have been numerous and vocal.  There was, at every step of the way, a fairly substantial chorus of respected voices urging caution, and always a few who consistently predicted that the end was near.  Investors tended to be appropriately circumspect in their response. 

 

That appropriate and beneficial caution seems at this point to be waning a bit and this has historically been a danger signal.   Recently more and more of those who have been on the sidelines are jumping on the bandwagon, and of such lemming-like moves are trend-ending conditions born, in the form of capitulation[2] either to the upside or down.  We really need a 5% or better correction to restore a little perspective.

 

Tax reform.   I was on record as being very suspicious of the tax legislation.  The final product, however, turned out to be much better than was originally expected.  Many of the worst changes were either eliminated or at least mitigated to some degree.   The increased standard deduction, together with broader tax brackets and lower rates for each marginal bracket, will result in lower taxes for just about everyone, even for many of those whose deductions for state and local taxes are limited.  Many, perhaps most of the beneficiaries will spend those dollars that otherwise would have gone away in taxes.  The result should be increased demand for goods and services, predictably good for the national economy, as additional jobs are created to meet that demand.  The new jobs will create new taxpayers, restoring some of the revenue lost to the lower rates.

 

The impact of lower taxes for businesses will also work its way into the economy.  Businesses, after all, are only extensions of their owners and employees.  The profits, after they have been taxed, do show up in the paychecks of the employees and owners, and in the dividends of individuals and our pension funds, and ultimately work their way back into the economy, stoking additional demand for the goods and services those businesses provide and their employees consume.  It’s a virtuous cycle, and it is being frontloaded by the completely unexpected reaction of businesses across the country already, in the form of employee bonuses and increasing salaries.

 

All of this to say simply that there are more reasons to expect the positive trend to continue than there are to be fearful of a sudden and traumatic ending.  My optimism notwithstanding, we continue to strive to practice responsible asset allocation, never getting too aggressive or too cautious, aspiring to take what the market will give us while hedging against the day, and it will come, when the market starts to take away.  If you do not understand how your own investment mix stacks up against this template, by all means reach out to us and we can have a conversation, and if necessary, make adjustments to meet your concerns or needs.

 

Happy New Year!  Hope it’s another banner year for one and all. 

 

Sincerely,

Jim Denton

James C. Denton, CFP®, EA
Managing Principal

 

[1] The S&P 500 is an unmanaged index measuring the performance of the 500 largest American companies and is commonly cited as an indicator of overall US stock market performance.  You cannot invest directly in the S&P 500 index.

[2] “capitulation” refers to our propensity to “throw in the towel” as it were, in the final stages of a strong market trend, either up or down.  The final stage of a bear market is said to be capitulation as those who have not previously done so, finally give up and sell out, resulting in a final, substantial fall in prices.  The same thing happens in reverse at the end of a major bull market move; those who have been waiting for a buying opportunity fear being left behind, missing out, “it’s never gonna end”, and pile on until there are no buyers left.



The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.