Another year is behind us and a new year begins. We are a nation in transition with a multitude of promised changes ahead. A lot of disconcerting things are happening in the world, yet there are so many great things to be happy about. To look on the positive side, last year was generally a great year to be invested.
As I was perusing through the 2017 collection of monthly summaries and newsletters, I noticed that there was a lot of good news for the markets and economy over the past twelve months. Employment and earnings are both strong and the economy is picking up as a result. In fact, I had to go all the way back to October 2016 to find a month when the S&P was down (after factoring dividends). To say this again, the S&P 500 was up every single month in the year 2017. I have gone through the archives of Thomson Financial all the way back to 1969 and confirmed there has never been a complete calendar year with every month having positive returns for the S&P until now. In fact, there has never been a period of twelve consecutive positive months for the S&P 500 of any kind until now. The closest we came was a ten month period in 1995 and here we are in 2017 looking at our 14th consecutive month of stock gains.
Before we get too excited, I can already hear the market say, “but what have you done for me lately?” While the Trump tax reform that was just passed should be a great catalyst for stronger corporate earnings, we fully expect volatility to creep back into the markets. It will be a rude awakening after being spoiled with the rising tide of returns across sectors and asset classes.
To illustrate just how little volatility we have seen over the past year, study the chart below. In 2017, the S&P finished up 19% with the largest drawdown amounting to only 3%. In other words, the worst drop the S&P 500 experienced over any span of time during 2017 was only 3%. In my twenty-one years of being a financial advisor, I’ve witnessed dozens of times when we have seen a 3% drop in a single day! 2017 was a boring year in that respect, but a year we would love to repeat over and over again for the sake of our clients’ portfolios.
You can see from the chart that such low volatility hasn’t been seen since 1995. This was followed by the Dot Com era of euphoric gains until the bubble popped in 2000.
History may not repeat itself, but it could rhyme. With the changes to the tax code, our economic model now shows another 20% increase in stocks possible before considering the market overvalued. As always, this is a moving target based on several factors including interest rates and inflation.
Although we would love to see another 2017 to take us to the tip of being overvalued, more volatility is on its way. This isn’t a bad thing! Market ebbs lead to market flows and we would anticipate any corrections this year to be short lived. 2018 has a lot of promise, but it will require a little more discipline than what we have become accustomed to. We welcome the challenges the New Year brings.