Year-End Market Musings

As 2017 prepares to enter the history books, it is turning out to be a very good year for risk assets. Not only have equity markets around the world moved higher, but money has flowed into higher growth (and higher risk) parts of the market. At one point during the year, growth stocks had outperformed value stocks by over 15 percent, the largest calendar year performance gap going back to the final innings of the tech bubble. For the first time in this expansion it appears as if animal spirits are starting to take hold.

As we entered the year, our expectations were for corporate earnings to grow fairly significantly off of 2016’s low base. This we got right. Boosted by a significant rise in energy sector earnings, S&P 500 earnings are expected to grow 9.5 percent for the full year 2017. As it currently stands, expectations are for earnings to grow another 10.5 percent in 2018. While we think maintaining organic earnings growth of this magnitude for 2018 will be challenging, corporate earnings could receive a significant boost from the tax bills approved in both the House and Senate. Time will tell how the final bill will read, but suffice it to say, corporations look like big benefactors of the changes being discussed.

In light of this, equity markets continue to move higher. Through the first 11 months of this year the S&P 500 has registered a positive return each and every month. If December prints another increase it will mark the first time EVER that every month of the year registered a positive return. The S&P 500 has only had one down month in the last twenty months. This is significant, and it is just another sign of the tiny amount of volatility that is in the system right now. And it’s not just the U.S. that is benefiting. After 8 years of expansion, the market cap of global equities as a percentage of GDP has now surpassed the peak from 2007. It’s just one of the many signals leading us to believe that most of the gains from this economic cycle may be in the past.

Later this month the Allegiant Investment Team will gather for our annual Investment Outlook Summit. I’ll share more of our thoughts over the coming months. However, one thing is for sure; the entire team believes we are in the later innings of this economic cycle. This does not necessarily mean equity markets will do poorly in 2018, but it does mean that risk levels are increasing and the possibility of a recession in the coming years is increasing as well. While it is prudent to continuously re-evaluate risk levels (especially late in the economic cycle) and adjust the portfolio as necessary, trying to time the exact top of the market is not realistic. However, we must be certain that when that next downturn comes, you are prepared to weather the storm with the portfolio we have constructed (we have written extensively about this over the last few months). With the watchful eye and constant vigilance of our investment research team, not to mention a little luck, as cracks in the system appear we will make more significant changes to help guide you through any downturn.

If you would like to see more data and charts about the economy and various financial markets please see our Monthly Insights book, which is published at AllegiantPA.com.

Click Here to View the Full Book

Benjamin W. Jones, CFP?, AIF?

Chief Investment Officer

Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance in no guarantee of future results. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. The Dow Jones Industrial Average is a price weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Russell 3000 is a market capitalization weighted equity index encompassing the 3,000 largest U.S. stocks. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The Emerging Markets Index is a float-adjusted market capitalization index that consists of indices of 21 emerging economies. The CBOE Volatility Index is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The Shanghai Composite Index is a stock market index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The ISM Manufacturing Index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The Non-Manufacturing ISM Report on Business is a purchasing survey of the United States service economy, published by the Institute for Supply Management. Investments involve risk including possible loss of principal amount invested.