“It is not necessary to do extraordinary things to get extraordinary results.” Warren Buffett
The stock and bond markets in 2017 were truly in extraordinary form despite the economy not necessarily growing in an extraordinary fashion. Don’t get us wrong; many economic indicators look great and point to a healthy economy. These include unemployment being down to 4.1% (which is near full employment), wage growth starting to pick up, and the housing market looks strong. Perhaps the most important economic indicator is GDP growth which will finish the year around 3%. This is a solid number but certainly not extraordinary. We do not believe that 3% GDP growth, or any of the other economic indicators for that matter, were enough to justify a 21.83% surge in the S&P 500. It is our belief that although the positive economy contributed to the market growth we saw this year, the real fuel behind the fire was low interest rates and speculation of lower taxes and less regulation. Regardless of your political point of view, evidence indicates that the stock market loves lower taxes and less regulation.
If we take a look at how the different asset classes performed this year, you will see it was a great year for diversification. At Financial Strategies Group (FSG), we have long held the belief that it is critically important to invest domestically and abroad (including Emerging Markets). We have also encouraged holding onto bond positions despite rising interest rates (rising rates are typically bad for bonds). These investment principles we hold are not supported by any sort of clairvoyance; it is simply a matter of knowing the power of global diversification over the long term. This was certainly a year the power of diversification was on display as detailed below.
|S&P 500 (Large Cap US)||21.83%|
|Russell Mid-Cap (Mid-Cap US)||19.11%|
|Russell 2000 (Small Cap US)||15.63%|
|MSCI EAFE NR (International Developed)||25.03%|
|MSCI EM NR (Emerging Markets)||37.28%|
|Barclays US Agg Bond TR (Bonds)||3.54%|
At FSG, we tend not to offer many market predictions. That is not to say there is a shortage of opinions on markets swirling around the office (Brandon and Brice have yelled at each other on fishing trips about which emerging market small cap fund is best). We hold back broadcasting our predictions because we are fully aware the market really does not care and we are no more likely to predict correctly than the “market experts” at the world’s largest financial institutions.
Every year we take a look back at the predictions of these “experts” for the preceding year. This affair usually involves a little laughter for two reasons:
- They are nearly always wrong but they keep trying.
- They are often so similar that if this exercise was a final exam, a professor might accuse the whole class of copying.
For example, in 2017 the S&P 500 finished the year at 2,673. The predictions as to how the S&P 500 would finish from the world’s largest financial institutions ranged between 2,200 – 2,500 (Merrill Lynch 2300, Citigroup 2325, Credit Suisse 2300, J.P Morgan 2400, UBS 2300). If any more evidence is needed of the futility of making concrete predictions, simply rewind the clock to December of 2007. You will see that none of these large financial institutions were able to predict the worst recessions since 1929.
Alas, we as financial planners first and investment managers second do have some thoughts for 2018:
- The current bull market is a little long in the tooth. That is not an opinion; that is a fact. This bull market is one of the longest in history. It does not mean it cannot continue however, all good things must eventually come to an end. We would be foolish to continue to expect double digit returns.
- The impact on bonds of rising rates has been minimal so far and may remain that way. The fed has risen interest rates slowly and steadily and thus far bond markets have not responded negatively. If the fed continues this responsible strategy, it’s possible bonds may not experience the significant downturn some have predicted.
- Now that tax reform has passed, it could give this bull market the second wind it needs. The market has liked this reform so far, however, it needs to translate into increased spending by consumers and increased earnings for companies in order for this to continue.
- We do have some concern about the federal debt level. Most households would prefer to be debt free and although it is healthy for a government to maintain some debt, the current debt level is high.
- We still very strongly believe in international diversification. Although 2016 and 2017 were great years for international investing, there is a relatively strong case to be made that many countries still have a lot of room to grow in the market cycle when compared to the U.S.
We hope you enjoyed our year end market update. If you know someone who would be interested in also receiving our newsletter, please have them sign up on our website. As always, if you have any questions or concerns please call. Happy New Year!
This commentary on this website reflects the personal opinions, viewpoints and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.