The advisors at River Wealth are committed to enriching investors by sharing their insights and understanding of the market by regularly publishing the Market Currents in our quarterly Currents Newsletter.
Fourth Quarter 2017
2017 was an outstanding year for investors in financial markets. The global economic expansion accelerated, corporate earnings improved and stimulative domestic fiscal and regulatory policies expanded, capped by the year-end tax overhaul. As 2018 begins, talk of additional stimulative infrastructure spending is increasing, potentially adding more fuel to the domestic economy. This is potentially good news for markets in the year ahead.
As domestic markets continue to find all-time high levels, and international markets experience their most significant returns since the financial crisis, we approach the New Year with a heightened level of vigilance. By most accounts, the market experience in 2017 is capable of proceeding this year. However, returns have been significantly above long-run averages and valuations are high, increasing the likelihood and potential of a market correction down the road. In addition, while both equity and bond markets provided healthy returns last year, a consensus is building that both long and short-term interest rates will increase this year, potentially dampening bond returns. We remain focused on keeping portfolios properly allocated and well diversified, maintaining the discipline to weather whatever markets we confront in the future.
Global Economic Conditions – Global economic conditions continue to accelerate heading into 2018. Domestically, real GDP has posted two quarters of year-over-year expansion above 3% for the first time since 2014, in what seems to be a more stable and sustainable path for growth. International economies have also expanded at an accelerated pace. Economists have recently referred to the current environment as a synchronized global expansion.
Corporate Earnings – Corporate earnings growth has accelerated, boosted by the reduction in shares outstanding, resulting from buyback activity, along with the recent tax overhaul in the U.S., which significantly reduced corporate tax rates. Expectations for 2018 remain optimistic as analysts project double-digit earnings growth to continue.
Domestic Policy Activity – After a year, where despite several major attempts, not much legislation was passed, significant tax law changes were signed into law in late December. Corporations seem to be the biggest benefactor of this legislation, which attempts to bring U.S. tax rates in line with our trading partners around the world. The new law decreased marginal rates, increased income brackets and provided for a larger standard deduction, which could result in lower average federal rates for many individual tax payers. It will take some time to see if the expected economic benefit materializes, as all parties involved scramble to understand the impact of the new legislation.
Central Bank Activity, Rates and Inflation – In December the Federal Reserve increased the Federal Funds rate, which was widely expected, to a range of 1.25% to 1.50%. Despite an expanding economic and employment situation, rates remain relatively low, as modest inflation has given the Fed room to gradually tighten monetary policy. Consensus opinion is that the Fed is likely to increase rates two or three times in 2018, with the first rate increase happening at the March FOMC meeting.
Geopolitical Concerns – To repeat from last quarter’s note, in the shadow of strong financial market performance lies a sense of concern that some unpredictable policy situation could cause systematic problems. These concerns are primarily focused on foreign relations and trade policy where relationships are complicated, delicate, and sometimes tenuous. Investors should remain vigilant of these developments that could derail other economically positive policies.
As always, we remind investors to remain focused on long-term objectives. We regularly note that; maintaining a disciplined approach during spates of volatility opens investors to opportunities, and perhaps, more importantly, prevents costly mistakes. It should also be noted, particularly at time like this, that chasing returns in steadily growing markets may have similar pitfalls.
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