Written by: Benjamin Bimson CIMA® / CIO, BCJ Financial Group
The year in brief.
2017 has given market investors something to celebrate. Stubbornly resilient equity markets, calmer geo politics than the worst-case scenarios and a stubborn hope for better things to come have been hallmarks for this year. The effects have been felt across all stock indexes in the US with the Dow Jones up over 22%, the S&P 500 up over 18%, the NASDAQ up more than 27% and even the Russell 2000 index that struggled in the first half of 2017 is now up over 12% YTD. Global markets shared in the general cheerfulness of the market expansion in both developed countries and emerging markets. In fact, we are still on track to close out the year with the second smallest inter-year drawdown since 1929. 1
US Economic Health
By nearly every measuring stick, the economy has been expanding throughout the year. GDP has increased every quarter from the year prior. The first quarter kicked off weaker than expected but jumped in the second quarter to better than expected 3.1% and the latest reading of the 3rd quarter was 3%, over half of a percent more than had been expected.
Inflation, as measured by the Consumer Price Index (CPI) has a lower expectation than it did last year but is expected to pick up slightly in 2018.
Unemployment has dropped to an impressive 4.1% according to the last projections. This is lower than the Federal Reserves long term target rate of 5%.
Interest rates have undergone 2 rate hikes by the Fed this year already and one more is anticipated at the December 13th meeting. This would increase the target rate to 1.25-1.50%. This is still historically low but moving more towards interest rate normalization.
All the economic indicators (leading, coincidental and lagging) as reported by The Conference Board when taken in aggregate represent a wide range of economic activity readings are indicating strong upward momentum going into the end of the year. Here is a chart that show these three indicators all combined to represent “the economy.” Accordingly, a recession does not seem to be right around the corner.2
Global Economic Health
Global economic conditions finally started to improve after years of extremely sluggish growth. It is far from what we would consider high growth, but is improvement nonetheless. The steady improvement has been a welcome change. The stable improvement seen monthly has not been seen in the global economy since mid-2011 according to the Sentix Global Economic Conditions Index.
According to the Ned Davis Research Global Recession Probability Model, there is not abnormal risk or global recession currently. The global risks are unique from the US in that global recessions can occur when there is no recession domestically. The US Recession Probability Model Based on State Conditions is also showing that a US recession is unlikely at this time. Typically, when both models are indicating a low chance of recession, the indicators are telling us that even if the market was to put in a top now, it would be months before we saw an economic recession develop.
With a strong market behind us and looking forward into 2018 there are certainly risks that we outlined a few weeks ago.
- Stock market valuations are high.
- Earnings expectations for 2018 are high.
- The Fed is tightening interest rates.
- The yield curve is flattening.
- Inflation could become a headwind if it picks up more than expected.
- Investor sentiment is high and overconfidence, should it develop could be a sign of a market top.
Sometimes it is easy to focus a lot on the risks and forget what has happened in the past. Pundits have at times seemed to root against the market, but 2017 was greater than most consensus forecasts a year ago.
The road behind us was smooth and the economy has been surprisingly robust. Tax reform is still being hashed out in Washington. We will be working on a forward-looking commentary in the coming weeks, so stay tuned!
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