UncategorizedYear In Review 2017: Year In Review


As years go by, many investors will affectionately refer to 2017 as the year of the search. The year began with investors and professional advisors each searching for what would derail the relentless upward-moving market. For those obsessed with uncovering the answer, their work continues still today. Unfortunately, fear of the “what if” caused many to chalk up 2017 as another year of missed opportunity.
The search continued with the notion that the so-called Trump Trade was dead. The problem with their thesis was that the rally was never about a Trump Trade at all, but instead earnings and global economic improvement were driving stock prices. Despite many articles to the contrary, fundamentals were improving and pushing stock prices higher.
The search continued mid-year with whispers that the economic cycle was old—long in the tooth, as some suggested. Voices grew louder, recounting that of the 23 recessions since 1900, 21 of them had taken place within 8-1/2 years of the prior recession’s end. With 2017 marking the eighth year of the current expansion, recession aficionados grew increasingly visible and stern in their warnings. Economic expansions aren’t born in a day, nor do they usually die at a predetermined time due to old age.
Attention then turned to newly elected/appointed administration. Surely the markets reflected too much optimism about what Washington could agree upon. Such lofty goals could never be met and surely stocks would collapse. This marks another myopic moment for those searching for an excuse not to believe in the rally.
Political uncertainty, whether domestic or abroad, is no longer an exception, but rather the new normal.
North Korea was among the most common search results of 2017. The idea of nuclear missiles flying about the skies would surely be the geopolitical event to bring an end to the bull market. However, history has shown with the Cuban Missile Crisis and throughout the 1990’s, when North Korea was “on-stage,” that the markets are
often more resilient than expected. It’s amazing how quickly historical perspectives escape us when we are faced with “unprecedented” times. The S&P rose over 250% during the years North Korea started sabre-rattling over its missile program, much as it did last year.
Despite the adversity mentioned above, a pro-business dialogue dominated much of the discussion in Washington, driving both consumer and business optimism to all-time highs. Consumer spending and residential homebuilding directly reflected the strength of the labor markets. Retail sales (ex. autos) rose 4.9% from Nov.1 through Christmas Eve, the fastest such pace since 2011 (vs. 3.7% for the same period in 2016). It seems only fitting that Consumer Confidence closed the year with a reading of 122, close to 17-year highs. In fact, with most sectors of the economy having closed out the year with positive momentum, investors are facing a more promising economic picture than was the case this time last year.
Last year was one of stock market records. In fact, 2017 marked only the 7th year in the S&P 500’s history where the index never lost more than 5% from its closing high. The S&P continued its relentless rise to become the second longest bull market in history. Like the US economy, it didn’t die of old age. Growth led the way in 2017, as the Nasdaq led all the major indices with a gain of 28%. Technology wasn’t alone, however, as the Dow 30 Industrials confirmed the across the board strength of this secular bull market with its impressive +25% showing.


As one searches for 2017, history may very well document it as a remarkably normal year— not what many had expected. For the first time ever, the S&P 500 posted 12 positive months. It was a year of resilience. It was a year of historically low volatility. Searches rooted in anxiety and fear turned up few search results. It’s now time to turn the page on 2017 and prepare for the unknowns before us in 2018. Let the search begin…


Where 2017 left off, 2018 must begin. On the heels of a nearly +20% year for US equities and even more robust non-US equity strength, even an optimist must take a step back and evaluate the landscape. We believe the following key themes could dominate much of 2018:
  • Return of higher / “normal” volatility?
  • Investor complacency
  • Global growth (especially Europe Ex-UK)
  • The Fed (Interest rates & Balance Sheet)
As remarkable as returns in 2017 were, its sustained low volatility bordered on historic. Will such low volatility be sustained for another year? In Franklin Templeton’s 2018 Outlook, Ed Perks projects forward this way, “We are expecting a return to volatility in financial markets in 2018, the kind that we think is best suited to a nimble, tactical approach toward portfolio construction.” JP Morgan’s Dr. David Kelly simply states “…in 2018, a more thoughtful approach to investment strategy is essential.” Nimble and thoughtful are not mentioned to promote a specific strategy or product, but because they personify prudent investing. We believe we must spend only moments celebrating 2017 successes before moving forward to focus upon what lies ahead.
T. Rowe Price summarizes the last few years: “Strong growth, ample liquidity, and low inflation have produced an extended period of exceptionally low volatility—not just in global equity markets, but in credit and currency markets as well.” UBS projects that “abnormally low levels of volatility may end on the back of monetary tightening, political flux, and technological disruption.” We cannot forecast when volatility will normalize and what will be its precursor, but we are in good company in believing higher levels of volatility lie ahead. We wholeheartedly believe that managing for such volatility is both prudent and essential, for in such volatility are increased opportunities for investors.
Among the many implications of low volatility is investor complacency. Goldman Sachs notes that when stock markets rise with extraordinary resilience as in recent years, investors tend to start “herding.” Passive investment in stocks tends to rise while perceptions of risks tend to fade, up to the point where there is a correction. Paul Christopher of UBS explains that “the slow pace may lull some investors into thinking that this time is different, which can become be basis for impulsive buying.” There are signs of complacency and yet remnant fears from the financial crisis persist.
The US economy, by nearly all accounts, has been steady and resilient in its climb from 2009 forward. Thru global political tensions and commodity chaos, the US economy has continued to push forward. While the US Federal Reserve faces “normalizing” interest rates and beginning the unwind of its balance sheet in 2018, most of Europe faces no such immediate headwinds. Aside from the UK, few interest rate policy changes are anticipated in developed Europe.
Resultant largely from delayed policy-making, Europe’s recovery has lagged that of the US by nearly half a decade. European consumers are beginning to unleash several years of pent-up demand…” says T. Rowe Price in its 2018 Outlook. While European members have not moved fully beyond all obstacles that caused their economic downturn, on a relative basis they present a greater upside on the current stage. A common thread among most investment outlooks is a preference for non-US developed equities. Vanguard projects non- US equities outpacing US Equities by 2.5% over the next decade (5.5-7.5% non-US vs. 3-5% US). While we agree European outperformance is likely, we also recognize the framework of this story is also tenuous. A single misstep or global event could inspire a risk-off trade that could trigger a quick reversal of fortunes for investors not appropriately allocated to risk assets.
The challenge of managing risk and return in 2018 to many seems comparable to the complexity of the challenge faced by the US Federal Reserve; both are of historic proportion. At no other point in history has a Fed been faced with simultaneously transitioning chairs (February), raising rates (consensus is 2-3 rate hikes in 2018), and reducing its balance sheet. With an eye on its elusive 2% inflation target, any perceived misstep by the Fed could be the impetus for fits of volatility. As Goldman Sachs states, “tighter money is not always bad for markets as long as it reflects improving growth, but central banks’ movements toward the exit could create significant pockets of volatility in both currencies and stock markets. We expect central banks to proceed with caution, still supporting a favorable trend in financial markets in 2018.”
Inevitably, as we read, we come upon content that cannot be easily incorporated among our key points, but should not be left out either. We believe the excerpts below touch upon a few other material considerations as we head into 2018:
  • “Global merger and acquisition (M&A) activity is expected to rise in 2018, encouraged by the strength of the global economy, historically high corporate cash levels, still low financing costs and a proposed tax break for US corporate profit repatriation”– Goldman Sachs
  • “The Research team forecasts modest returns in equities and credit, negative bond returns, a strong dollar, higher levels of volatility…”–B of A Merrill Lynch
  • “In our opinion, the primary portfolio challenge for the coming year will be to assess risk and reward more diligently.”—Wells Fargo
  • “Cash isn’t always king, diversification is essential, harness the power of compounding and don’t let volatility derail you.”–JP Morgan
  • “We believe 2018 will be a year in which it will pay for investors to be more agile.”–UBS
No different than every year that has preceded it, 2018 lies wrought with challenges and uncertainties. On the heels of another great year for equities in 2017, investors are left asking how to best manage risk/reward in an environment unlike any we’ve ever faced. Low rates globally have made bonds less appealing, spreads have narrowed to the point that credit-sensitive bonds offer minimal upside. That leaves equities as the lone source of HOPE in most investment outlooks for 2018.
In preparing for this year’s HIP Market Outlook, we were struck by how closely aligned the outlooks most major investment firms are…and that truly concerns us! Such a strong consensus is often short-lived and quite often overlooks major obstacles at the expense of its own agenda/perspective. The consensus of overweighting Europe, shortening duration, and favoring financials were overwhelming. That doesn’t imply they will all be proven wrong, but rather that one should plan as if they could be.
Several firms acknowledged that the margin for error is slim and the repercussions of any economic/political misstep could be substantial. No single approach will always be in favor, despite what recent years might suggest. Strategic solutions that can capitalize on our outlook should be partnered with tactical solutions that have a technical component and low-correlated strategies that seek to benefit from a return of market volatility. Put simply, without a diversity of strategies, it’s hard for us to imagine how an investor enters 2018 with confidence!

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