2017 — High Returns, Low Volatility
2017 was a terrific year in which to be an investor in the equity markets. The S&P 500 established a new all-time high, and returned 21.8%, which was its best one year return since 2013.
Not only were the returns high, but volatility was extremely low. During the year the S&P 500 was up every month except for March, and the loss in March was less than 1%. In fact, the S&P has not had a pullback of 3% or more since November of 2016. This marks the S&P’s longest run without a pullback … ever. The Dow Jones Industrial Average has also had positive returns for each of the past 9 months. The last time the Dow accomplished this was in 1959.
Many clients were surprised that with all the turmoil and uncertainty in Washington DC, the markets continued to rise without a care. I believe the key reasons for the strong markets were low interest rates, and strong earnings growth. The Federal Reserve raised the fed funds rate 3 times in 2017. This moved short rates up, but longer term rates stayed low. During 2017 the US economy grew at almost a 2.5% annualized rate, and added an average of over 170,000 jobs per month. The current unemployment rate is 4.17% which is the lowest unemployment rate in 17 years. In addition, consumer confidence is at an all-time high.
The equity markets have been rising for over 8 years, and many are wondering when this bull market will come to an end. The true answer is that I don’t know, and I don’t believe anyone else knows either. Since 2010, there have been 18 market corrections; 14 have been between 5%-10% and 4 have been between 10%-20%. After each of these corrections, the market has recovered and then continued higher. A correction will not necessarily signal the end of the bull market.
What will the market do in 2018? Neither I, nor anyone else can truly predict what the market will do over the next 12 months, just as no one was able to predict what the market did during the last 12. I believe that basing investment decisions on predictions of near-term market performance is detrimental to one’s long-term investment returns. I will continue to spend my time looking to invest in stocks that will create long term value, and to sell stocks where the downside risk is greater than the potential gain.