With an unexpectedly strong US stock market performance in 2017 — the S&P 500 up 19+% and the Dow up even more at 25+% — and the smallest drawdown in 38 years of just 3%, history suggests this year’s returns won’t measure up to last year’s and that volatility will return.
Unemployment simmers at 4.1% with wage inflation still lagging expectations. Consumer confidence continues to climb to new highs, interest rates remain benign even as the Fed raises rates slowly and cautiously, loathe to derail a sub-par recovery. Earnings, the primary driver of this bull market, look set to continue climbing, but can P/E’s keep expanding? When does the market start discounting the inevitable end?
We would argue, simply, not yet. While less bullish now vs. a year ago, we remain constructive. Tax reform came earlier with bigger corporate tax cuts than expected, providing a meaningful tailwind to company earnings.
The earnings impact from a slashing of the corporate tax rate, tax repatriation and immediate capex expensing should move earnings meaningfully higher, and markets follow earnings.
Despite being late in the economic cycle, this new stimulus probably lengthens that cycle, even as further job creation likely pushes up wage inflation, encouraging more aggressive tightening from the Fed. The impact on industry sectors and companies will vary widely, rewarding smart stock selection over market indices.
Investors of all ilks seem finally to have embraced the nine year long bull run. Record low levels of cash at major retail-oriented brokerage firms such as Charles Schwab and lower cash levels at institutional investors, combined with new higher earnings forecasts and high stock valuations, suggest market volatility could return, with the risk of exogenous events providing an excuse to take profits while simultaneously creating buying opportunities. It is likely, however, that the market ends 2018 higher than it is now, with international markets continuing their strong performances as well.
As always, we at YorkBridge Wealth Partners carefully monitor, study and analyze economic and market conditions, considering worst case scenarios and impacts, to stormproof your portfolios while allowing best in class portfolio managers within carefully selected asset classes to maximize your return potential.
Please don’t hesitate to contact any one of us if you have questions or concerns.
The Information contained in this document is based on data received from third parties which we believe to be reliable and accurate. YorkBridge Wealth Partners, LLC has not independently verified the information and does not otherwise give any warranty as to the truth, accuracy, or completeness of such third party data, and it should not be relied upon as such. Any opinions expressed herein are our current opinions only. YorkBridge Wealth Partners, LLC is an SEC Registered Investment Adviser under the Investment Advisers Act of 1940 (“Advisers Act”). Registration of an investment advisor does not imply any specific level of skill or training. The information contained in this document is to assist with general planning. Please consult with your own tax advisor and attorney for more specific information.