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New Year Economic Update
2017: We can say with certainty that 2017 has been one for the books. And we mean that quite literally. We saw significant gains from almost every sector of the market and for the first time in history, the S&P 500 was positive all 12 months of the year. Couple that with the fact that statistically this has also been the least volatile year in the history of the S&P 500. So for many investors last year was about as good as it gets, superior investment results with minimal volatility.
Economically speaking, 2017 was one of the strongest years since the financial crisis. A bellwether of any economy, is the unemployment rate. Over the last year the unemployment rate in the United States declined solidly below the average rate, and below the rate at which economists refer to as a “fully employed” economy. Public companies here in the United States and globally experienced growing profits and earnings with consumer surveys indicating they are feeling as confident as ever about the economy. With low interest rates, lower commodity prices and minimal inflation the economic environment for consumers and businesses was just about perfect. The economic data and environment reverberated throughout the worlds global markets. One of the big storylines of 2017 was “global synchronized growth”. And that really tells the story of last year, as the economic data and sentiment has looked strong all around the world. This provided a perfect backdrop for some of the substantial global market gains that occurred last year.
Looking at the geopolitical climate through the television over the last 12 months yielded some valid skepticism and worry as it pertains to the global economy and stock market. Its worth a reminder that sometimes the lens we look through can distort how we see the world. When you look back through history at the stock-market and the political climate, it is littered with examples of turmoil that resulted in positive outcomes for investors. 2017 was a perfect example. You can usually expect some volatility in any given year with the types of headlines we saw last year. Whether it be rhetoric from Washington, threats of violence from the Korean peninsula, or Russia meddling in global affairs amongst many others. We think the economic data was simply good enough for the market to tune it out.
What’s Ahead: So, what do we think moving forward? Well, it seems likely that this economic environment will continue at least in the near-term. Tax-reform will potentially act as a tailwind for the early portion of 2018 as public companies in the United States will likely report higher earnings simply due to lower tax liabilities. While that is good in the near term, the potential effects to the economy in the longer-run over the next 2-3 years can be somewhat negative. As we mentioned in recapping the previous 12 months, things don’t really get much better from a business or economic environment standpoint. Tax-reform has the potential akin to throwing gasoline on an already blazing fire. Unemployment is unlikely capable of going much lower, which should in turn cause wages and inflation to begin to rise. The Federal Reserve has announced that they are planning on increasing interest rates several times over the next year with the idea of preventing the economy from “overheating”. An economy, like a pot of water can “boil over” once it becomes too hot with sustained fiscal and monetary stimulus. It seems as if in the near-term, that is the biggest risk. Over the next 18-36 months, signs of rising interest rates, commodity prices and rising inflation can signal the later stages of a business cycle. So, while it is impossible to predict exactly when a recession can occur, we must accept that the economy is cyclical and certain signals over the horizon that coincide with the latter stages of an economic cycle do seem to be appearing. We are positioning for these possibilities in our portfolios.
On the International front, there are still some headwinds facing the United Kingdom with the exit from the European Union looming ever closer. There will be significant global affects on trade deals, specifically in Europe but reaching all the way to North America. It appears as if tensions on the Korean peninsula have for the moment, simmered. North and South Korea have agreed to return to the negotiating table, hopefully with positive outcomes. The longer-term implications of a nuclear armed North Korea remain in question for U.S. relations as well as the rest of Asia.
There has been substantial question regarding the implications of Bitcoin and other crypto-currencies. While we do not possess the technical abilities to dive deep into the intricacies of the technology, at least for now it does seem to exhibit the hallmarks of an asset bubble. What we think is interesting is it speaks a little bit towards investors risk appetite at this stage in the economic cycle. There are far too many individuals who are taking significant risks as we have been removed by at least 12 months from any bout of market volatility or economic turbulence. Are there any implications to the economy? We have no idea, but it will be interesting to see what it could do to investor confidence in the markets should the sharp rise in price eventually collapse.
In Summary: 2017 was a great year not only for investments but for the global economy. Unfortunately, perfect economic and investment conditions do not happen all that frequently and often not for extended periods of time. As a matter of fact, the last time the term “Goldilocks” was used to describe the economic environment were early parts of 2007. Over the next 2-3 years there is certainly risk of this long economic cycle nearing its end. We hope to have another successful year in the markets, but remain vigilant to monitoring the current economic conditions and positioning your portfolio appropriately.
This economic updated was written and edited by Robert Jeter, CFP ®, CRPC® and Eric Johnston, CFP®, AIF® of InFocus Financial Advisors, Inc.
The views are those of Robert Jeter and Eric Johnston and should not be construed as specific investment advise. Investors cannot directly invest in indices. Past performance is not a guarantee of future results.
Securities and advisory serviced offered through Cetera Advisors LLC, member FINRA/SIPC. Cetera is under separate ownership from any other named entity.