Investment Update – Quarter 1

The end of 2017 brings to a close one of the best years for global equity markets in nearly a decade. I like to think of 2017 similar to the climb to the top of a rollercoaster. People were excited, it was a slow and steady climb, and there wasn’t much in the way of surprises. Every month, your account value seemed to be higher from the previous month. It was a banner year in terms of market returns. Here are a few we want to highlight:

The numbers above indicated the importance of asset allocation. There was a huge performance discrepancy between different areas of the market, particularly Large Growth companies vs. Small Value companies. The chart below is a Morningstar “style box,” which is a nine-square grid that provides a graphical representation of the “investment style” of stocks and mutual funds. For stocks and stock funds, it classifies security performance according to market capitalization (the vertical access) and growth and value factors (the horizontal axis).

Large Growth was +30.2% in 2017 while Small Value was +7.8%. This is a difference of over 22%. This is why proper diversification is needed because we cannot predict when we feel one area of the market may outperform in any given year.

2018 – Outlook

After a slow and steady climb in 2017 and the least volatile year since 1995 (only a 3% decline in the market at any given time), we knew the rollercoaster ride was about to begin. Sure enough, we have witnessed a lot of market volatility over the past months. We believe the recent market volatility was caused by fears over rising interest rates and a resurgence of inflationary fears. It is uncertain where this market may level off and stabilize, but at this point we think the market moved lower due to technical and not fundamental factors. Fundamentals remain strong for the economy with low unemployment, wage growth, corporate profits and recent tax relief. Given this, we do not believe it is the beginning of a bear market, but a healthy correction within a bull market that still has room to run.

Here is a look at what’s happening in the economy and capital markets, as well as key factors we are watching:

Economy

Late additions to the tax law passed in late December, which reduced corporate taxes, among other things, should add a little growth to the GDP in 2018. The law is less likely, however, to produce long-term growth, according to Raymond James Chief Economist Scott Brown. Economic growth will face headwinds from a tight job market and slow labor force growth, but an increase in wages over time could lead labor to become more efficient.

The Federal Reserve’s transition in leadership early in 2018 is expected to be smooth. The outlook for monetary policy, however, could become cloudy in the second half of the year, when policy errors could carry greater risks.

We believe the Fed will maintain its gradual and data-driven approach to raising interest rates, with the expectation of at least two increases to the federal funds rate for 2018. Depending on the data, however, the Fed could opt for more or fewer increases.

Equities

Conditions support a positive outlook for 2018: improving global economies and corporate earnings, as well as stable inflation levels and interest rates, according to Raymond James Asset Management Services Chief Portfolio Strategist Nick Lacy.

“If you look at the pillars of support, and if you back that up with technical support, you can’t come up with any case where this market is going to roll over any time soon,” Director of Equity Portfolio & Technical Strategy Mike Gibbs said.

Energy stocks mostly lagged oil prices in 2017, but Senior Vice President of Equity Research Pavel Molchanov expects it to reverse in 2018; he envisions upside for both, with the equities outperforming the commodity. Typically, investors will experience three bull mar-kets in their lifetimes, Chief Investment Strategist Jeff Saut reminds us. Consider whether the current one presents an opportunity for you to accumulate wealth.

International

Despite German Chancellor Angela Merkel’s inability to yet form a new majority government, European optimism rose to multi-year highs during December, helped by economic growth uplifts and an improving tone to the Brexit debate talks, which have moved to a sec-ond, more detailed stage.

The Chinese economy and its currency, the yuan, were surprisingly resilient during 2017, and the announcement of a new round of anti-corruption initiatives to accompany ongoing economic reform measures continues to show leadership’s commitment to change. While emerging market assets pulled back somewhat during December, overall it was a positive year. Further progress can be made in 2018 if global trade markets remain fluid and the dollar does not bounce aggressively, according to European Strategist Chris Bailey.

Fixed income

The outlook for U.S. fixed income remains obscured by economic and political uncertainty, according to Senior Fixed Income Strategist Doug Drabik. Among the forces at play will be tax legislation, Federal Reserve personnel changes, the global economy and central bank policy. Though challenged to contribute to total return in a rising interest rate environment, fixed income plays an important diversifica-tion role for its ability to mitigate the risk of equities.

Bottom line

Looking to 2018, the equity markets remain bullish, with any volatility representing the first real buying opportunity for more than a year. The 2018 outlook for fixed income markets is uncertain, with economic and political factors likely to play key roles in the coming months. As we head into a new year, we will continue to monitor economic developments and breaking headline news, and will keep you updated with the most relevant information.

Please let us know if you have questions about recent market events or how to position your long-term financial plan.
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Disclosures:

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

All investments include a risk of loss that clients should be prepared to bear. The principal risks of Vance Wealth strategies are disclosed in the publicly available Form ADV Part 2A.