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Investor Discussions-2017 Was a Great Year. Can We Have Another for 2018?

Wealth & Pension Services Group
William Kring, CFP, AIF - Chief Investment Officer

January 2, 2018

This time last year, investors were wondering when the market would sell off, giving back the "election bump."  To follow, we got a failed repeal of the Affordable Care Act, a drawn-out tax reform campaign which most Americans seemed to dislike, and North Korea shooting missiles, among other things. Goldman Sachs, Credit Suisse, and other big firms predicted a year of minimal gains, at best. Yet, the stock market managed the longest streak on record without a pullback of 5% or more.

There are real reasons for the market's continued strength. Not the least of which is good old-fashioned corporate earnings. And, yes, there are also reasons to perhaps temper expectations. But let's put those on hold for a moment and get back to what went right in 2017, as it may provide some clues for 2018.  

We've talked before about the power of slow, steady growth. My favorite stock market Economist, Brian Westbury coined this "The Plow horse Economy" - meaning this economy keeps plowing along. Not a thoroughbred economy, but one just good enough to get lots of work done.  We've talked about the need for earnings to keep the market going - they did. We've talked about the back to back hurricanes in late summer and how they would not derail the economy - they didn't.  We wondered if the tax bill would pass - it did. All of that helped to make 2017 a great year for stocks, and not so bad for bonds.

So What about 2018?

Is it possible that that the world is getting its economic act together, all at the same time? Yes. Is it possible the Fed can raise rates multiple times this year without tripping up the market? Yes. Is it possible, that the corporate tax bill is not already priced into the market? Yes. Is it possible we can have yet another good year? Yes. Without a correction? Doubtful. But let's not worry about that for now.

The Consensus View

This is the time of year where I am digesting every written word I can find about the market from any reputable source. If nothing else, it's nice to see who you are keeping company with and to know if you're on an island with your ideas.  Mostly, the market rewards you best when you're with the heard, and only occasionally stray. The herd, for now, is saying this market can continue. International and emerging markets should have the best growth, but the U.S. won't be far behind.  Bonds are fairly valued with little upside but will be needed for safety if the market corrects. Inflation may be percolating. Not enough to cause undue concern, yet, but enough to allocate some assets to commodities.  And finally, a recession does not look to be in the cards this year, maybe not even in 2019, so we can eliminate the biggest worry, for now.  I guess the only thing negative is too much of a good thing. Have you heard of the sentiment indicator, which is a backward way of looking at things? Meaning positive thinking - by everyone - as described above - is bearish, while having lots of the things to be concerned about is bullish.

So half joking, I guess you could say it's good that I can offer the following:  We are way, way over-do for a correction.  Too much economic growth can lead to wage inflation and cost of goods inflation - a big fat negative for both the stocks and bonds. Valuations are high. Interest rates are going higher, and the yield curve is flattening. And finally, we know a recession has started, only after it has begun. Feel better now?

To Summarize all of this...

In short, we are staying bullish, the concerns above not being relevant enough, yet, to be positioned differently. I say this knowing that we are going to have a correction, eventually. This "stay the course" message is a repeat from the summer of last year, and a good reminder of why we need to stay invested. (For more on this, I'll follow up later in the year with some interesting history about market action 12-24 months before a recession). 

More specifically, we will keep a sizable portion in developed international and a little in emerging markets. We are adding some currency hedging this year, to help protect our foreign funds from a rising dollar (the surprise). If the dollar says flat, this hedge won't hurt us. We will hold some small cap as they pay lots of taxes and should benefit from the lower corporate rates. You may see 2-3% in real assets as a hedge against inflation, but this will come from the bond portion of the portfolio, not stocks. We are adding a bond position with an interest rate hedge, seeking to provide a small benefit if rates rise. Finally, we won't chase or overweight growth, as that will be vulnerable if the market corrects. 

Your year-end portfolio statement and summary will be out in about ten days. As always, please let me know if you have any questions regarding your investments or financial plans.  

Best wishes for a wonderful 2018! 

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