In reviewing 2017, it was a great year for the stock market. Major U.S. indexes had their best year since 2013. Many markets overseas also had stellar years. One of the biggest surprises was the lack of volatility in the market. Usually there are ups and downs every year. There were more than 65 new higher closes in 2017.
It all started with the election in 2016. Investors felt a unified government, fewer regulations, infrastructure spending and income tax reform would stimulate the stock market. There was new hope the country would head in a new direction. People expected defense spending to increase and corporate tax returns to repatriate overseas profits back to the United States. Couple these things with low inflation and interest rates and you had an environment ripe for growth.
Many of the expected stimuli did not happen as quickly as thought. Health care changes never materialized, there was talk of impeachment and North Korea. These events were shrugged off by the market and did not even cause volatility. The stock market is a giant auction and people poured in money because of new hope. Although the economy had been growing slower than usual after a recession, there was newfound hope with the change in Washington.
The tax cuts just before Christmas further energized the market. Most people will experience some tax relief in 2018 and the corporate tax rate which had been the highest in the world was restructured to encourage bringing overseas profits back home. Some of the bonuses for employees and announced new investments in the United States by corporations have further fueled the market.
Bonuses paid to employees are often spent in the worker’s community and these dollars regenerate as other businesses hire more workers and buy additional inventory. These factors also increase economic growth.
While the market was not bumping in 2017, it also was not the same across the board. Bigger companies rose more than smaller companies. One reason might be that bigger companies sometimes generate more than half of their profits overseas. There is value in being able to bring these profits home and distributing them to stock holders or making new investments in plants and machinery.
The FANG stocks – Facebook, Apple, Netflix and Google – grew faster than many other companies. Apple, Facebook and Microsoft are all up 40 percent in the last year. I recently attended a conference where two money managers who oversee over $2 billion worth of investments predicted returns of five to six percent this year. Many other analysts have similar feelings. The market in January is already up this much in one month. Their guess is that the first half of the year will be strong as companies take advantage of the new tax laws and the second half will be more volatile. Some see a possible 1987 where the first part of the year was strong with a big pull back late in the year.
There are some flashing lights. The Federal Reserve Board is planning three rate hikes this year. While short-term rates have risen some, the yield curve has flattened out. This means that long-term interest rates have not moved up in relation to the rise in short-term rates. Sometimes this is seen as a sign of a possible slowdown or recession. Eventually, higher interest rates will have an effect on the market. It is normal for the stock market to have corrections. Contrarians would say that good news does not last forever and when people start jumping into the market for the first time, it is probably late in the rally.
Do not be afraid to take some profits off of the table if you need them in the next few years. When asked once how he made so much money, J.P. Morgan said, “I sold too soon.”
Gary Boatman is a Monessen-based certified financial planner and author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”
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