For the first time this century, investors benefited from synchronized global growth. The U.S. stock market (S&P 500) and developed global markets (MSCI Foreign Stock Index) both returned over 20% for the year.
U.S. investors bid up the price of shares on anticipation of lower taxes and higher corporate profits. The Federal Reserve believed the U.S. economy was strong enough to absorb three interest rate hikes during 2017, forecasts are for three more in 2018. Unemployment is low at 4.1% and expected to go lower. Consumer confidence is high - household net worth in the fourth quarter may have reached $100 trillion for the first time.
Market Rally Was Led by FAANG (Facebook, Amazon, Apple, Netflix, Google).
The huge rally in technology companies has shifted the sector weightings of the S&P 500 Index. In 2017 technology’s share of the index increased by 3%. Now at over 23%, tech stocks are the biggest sector in the S&P 500, by far. Financials and health care are next with 14% each. The run up in Amazon stock has pushed Jeff Bezos ahead of Bill Gates as the world’s richest man.
S&P 500 Was Perfect and Calm.
The S&P 500 index did not fall below its 12/31/2016 level on even one day during 2017. For the first time in its history, with dividends included, the S&P 500 did not have a single month with a negative return and 2017 did not see a single day with a greater than 2% move in the S&P 500, either up or down. The biggest intra-year drop amounted to just 2.8%, the smallest decline since 1995. The average intra-year pull back is 13.6%
Where Do We Go From Here?
We don’t know, no one knows. As John Kenneth Galbraith said, “The function of economic forecasting is to make astrology look respectable.” This bull market is up 376% from its March 9, 2009, low. However, bull markets don’t die of old age. Since 1950, the S&P 500 has risen at least 20% (including reinvested dividends) 24 times, not including 2017. In the year that followed, the index finished higher 19 times with an average gain of 18.1%.
It is usually recession or rising interest rates that kill a bull market. Leading economic indicators suggest that the odds of a recession are low for at the first half of 2018 and the Fed has indicated that while they will continue to raise short term interest rates, they will do so in measured manner.
That said, unexpected events can create short-term emotional responses in the market. We should not be surprised with a market correction. Since the end of WWII the stock market has experienced 14 bear markets, an average of once every 5 years. These bear markets have seen stocks decline an average of 30%. Each of these bear markets have been followed by new stock market highs. We believe no action is required if you have a financial plan that includes a diversified portfolio based on your tolerance and capacity for risk.