4th Quarter 2017 Market Commentary
New highs and the fundamentals
The S&P 500 Index finished the quarter at a record high. Notably, the closely followed gauge of 500 large U.S. stocks ran up its quarterly winning streak to eight consecutive quarters (WSJ, MarketWatch data).
It’s done so in the face of three devastating hurricanes—Harvey, Irma and Maria, dysfunction in Washington, unsettling news from North Korea, and gridlock in Washington.
But in many respects, it shouldn’t be all that surprising.
As I’ve wandered through the literary tulips with you, one common theme is a focus on the economic fundamentals.
Stocks take their longer-term marching orders from corporate profit growth. And profits are driven primarily by economic growth at home and abroad.
Currently, we’re in the midst of a synchronized global expansion, which has created a strong tailwind for earnings.
Moreover, interest rates remain near historic lows, and the Federal Reserve hasn’t been shy about signaling that any rate hikes are expected to come at a gradual pace.
If I had to concoct a recipe for bull market, I’d go heavy on profits, economic growth, and low interest rates—Oh, wait a minute—that’s today’s environment!
Now, I understand the hurricanes have changed lives and wrecked property in Texas, Florida, and Puerto Rico. If you are so inclined, please consider donating to relief efforts. Short term, the economic data is taking a hit from the storms. Longer term, it’s unlikely to have much impact on the economic trajectory.
While North Korea’s quest for an ICBM that can strike the U.S. is very unsettling, short-term investors seem to be pricing in the unpredictability of the rogue regime. More importantly—speaking strictly from an investment perspective—investors aren’t anticipating a disruption in the economic cycle.
So, while you should be prepared for more troubling news, it simply isn’t affecting U.S. economic activity.
Table 1: Key Index Returns
|Dow Jones Industrial Average
|S&P 500 Index
|Russell 2000 Index
|MSCI World ex-USA**
|MSCI Emerging Markets**
|Bloomberg Barclays US Aggregate Bond TR
Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar
MTD returns: August, 2017-September 29, 2017
YTD returns: December 30, 2016-September 29, 2017
**In U.S. dollars
“Don’t tax you, don’t tax me, tax that man behind the tree,” was attributed to the late Louisiana Senator Russell Long, who chaired the powerful Senate Finance Committee from 1966 to 1981 (NYT).
He assisted with tax reform in 1986, and Congress is now considering the first major rewrite of the tax code since then.
The initiative that’s been proposed by the President and the Congressional Republican leadership is simply a blueprint. It must clear a number of hurdles before becoming law.
The framework is silent on how dividends and capital gains will be treated, and no mention has been made of the 3.8% surtax on investment income for high-income Americans.
The outline calls for special treatment for retirement accounts, but no other details were provided.
Therefore, anticipating and positioning for changes becomes very difficult given the uncertainty surrounding the bill.
Meanwhile, a 20% top corporate rate has been proposed, down from 35%. It’s roughly in-line with most developed nations, and is expected to be supportive of stocks.
But it’s early in the game and any discussion of the final points is purely speculative.
Nonetheless, please reach out to me if you have any questions about tax reform or tax planning. Or, if you would like to discuss any other matters, I’d be happy to talk with you.
I’m simply an email or phone call away, and can be reached at email@example.com or 336-310-4233
The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
No strategy, such as diversification, can assure success or protect against loss in periods of declining values. Investing involves risk, including loss of principal
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
All indexes are unmanaged and an individual cannot invest directly in an index Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The MSCI World ex USA Index captures large and mid cap representation across 22 of 23
Developed Markets (DM) countries excluding the United States. With 1,024 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa.Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.