Financial Market Update
Welcome to the StrategicPoint Financial Market Update — a market and economic overview of what occurred last week and what’s up for this week. Please find our market commentary and most recent Blog posts in our StrategicPoint of View®.
While 2017 surely was a strong year for equities overall, the last week of the year was lackluster at best. Each of the benchmark indexes listed here posted week-over-week losses, except for the Global Dow, which increased 0.23%. Much of last week’s performance could be attributable to nothing more than light trading during the holiday-shortened week. The Nasdaq, which led the way for the year, lost the most ground, followed by the small-cap Russell 2000. The large-cap indexes of the Dow and S&P 500, which had been consistent gainers all year, pulled back the last week of 2017. Long-term bond prices rose, pushing yields on the 10-year Treasuries down more than 7 basis points by the end of the week.
The price of crude oil (WTI) climbed to $60.10 per barrel last Friday, up from the prior week’s closing price of $58.35 per barrel. The price of gold (COMEX) rose to $1,305.10 by early Friday evening, ahead of the prior week’s price of $1,279.10. The national average retail regular gasoline price increased to $2.472 per gallon on December 25, 2017, $0.022 above the prior week’s price and $0.163 more than a year ago.
S&P 500: 2673 (down 0.36% for the week and up 19.42% for the year)
NASDAQ: 6903 (down 0.81% for the week and up 28.24% for the year)
Dow: 24719 (down 0.14% for the week and up 25.08% for the year)
US Treasury 10yr: 2.41% (from 2.48% last week)
Crude Oil (February): $60.42 (from $58.47 last week)
Gold (February): $1,309.30 (from $1,278.80 last week)
USD/Euro: $1.2005 (from $1.1862 last week)
Market Commentary – StrategicPoint of View®
The Case for Risk Management in 2018
A friend recently said to me, “Anyone could make money in 2017.” Quite true, allowing for the slight exaggeration on “anyone.” The average equity investor benefitted from significant gains in the markets; The S&P rose 19%. IXUS (iShares Core MSCI International Stock Index) gained 28%, while even the traditional US Aggregate Bond Index had a decent year rising 3.54%. In addition, volatility was the most benign in recent history, with a maximum drawdown of only 3% all year, compared to an annual 14% drawdown over the last 35 years.
These levels of returns and comfort are unlikely to repeat themselves in the coming year. Yes, the global economy is on a roll — all 45 countries followed by the Organization for Economic Cooperation and Development are simultaneously expanding, an unusual confluence of events. And a good portion of the surprise upside to corporate earnings and revenue we experienced this past year could continue into 2018, especially with the new Tax Cuts and Jobs Act. Not to mention that higher interest rates and inflation have yet to be a real threat to returns. But the level of risk is picking up as we gradually move towards the end of the current business cycle.
Much of economic activity and investing moves in cycles or waves. What goes around comes around, albeit in a different format each time. Value stocks trump growth stocks, and then the reverse is true for a while. Commodity prices slump, struggling for many years until demand, inflation and currency factors reverse course and commodities revive again. And passive investing becomes all the rage, until correlations break down giving an opportunity for active investing again. In between, technology and innovation make room for change, so each time the cycle repeats itself it looks and operates a little differently. But at the end of the day we are talking about cycles, not permanent change, when it comes to most investing trends.
Of all the cycles we follow and care about, the business cycle is the one we keep an eye on most closely. Business cycles track economic booms and busts. Each cycle is different in terms of length, extent of growth, and severity of any recession, but the pattern is recognizable. The hardest part of monitoring business cycles is determining the tipping point that divides expansions from contractions.
It is this tipping point that is under debate right now. The current expansion is the second longest on record. It is also one of the slowest and weakest, supporting the theory that it has room to go before reaching any peak. And while there are certain traditional catalysts for when expansions end –inverted yield curves (i.e. substantive increases in interest rates), a burst of inflation, and changes in employment or spending, etc.– at the same time there are conflicting data, a range of opinion and inevitable uncertainty which can make it hard to know when the economy begins its descent. In fact, most people are unaware of when a recession actually starts, until it is declared retroactively by the National Bureau of Economic Research. As happens all too often, hindsight is the best predictor.
For 2018 our contention is that the bull market does have room to grow. We also believe that as the year progresses investors will become increasingly nervous that they will miss the signs of the expansion/contraction tipping point. Markets love to anticipate and to try to be the first to get major changes right. But the stock market itself is a terrible predictor of recessions (or recoveries for that matter). We could see a number of “false” pullbacks in stock prices before any true recession appears, which is simply another way of saying “the return of volatility”.
Let’s remember that volatility is also cyclical. It comes and it goes. It can be based on short term reactions or long term trends. It can be induced by algorithms and hedge funds or by simple investor fear. Momentum can compound volatility, while complacency can keep it at bay. And while it is a truism that what goes down eventually comes back up, each investor’s patience, self-discipline and ability to wait is different. Volatility challenges the buy and hold investor and demands that each investor understands his own tolerance for risk.
Whenever the next tipping point happens, it may not be enough for investors to passively ride the wave of the next recession. That is because it can be extremely hard to focus on the long run, when your goals and needs feel so important in the short run. In addition, buy and hold investing performs best in the early and middle stages of a recovery when it pays to be in the market. Investors who have just experienced a bear market are often reluctant to jump in.
However, during the late stages of the business cycle (which we believe we are currently in), more active risk management can be beneficial. It is on the downside that proper risk controls of portfolios can make a difference and be truly supportive of investors, helping them navigate what can become increasingly concerning waters.
So while we believe 2018 can be another profitable year for investors, we are also mindful that the recovery is aging and that we are getting closer to a time when the economy could dip into recession.
Yes, it has been a period when (almost) anyone could have made money in the stock market. But we foresee in the coming year or two that ‘losing less’ will become, once again, a dominant preoccupation of investors. And so the cycle goes on.
The first week of 2018 should see trading pick up. The December 2017 employment report is out this Friday, which could reveal a slight drop in the unemployment rate.
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*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.
The information contained in this report is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein.
Parts of this report were prepared by Broadridge Investor Communication Solutions, Inc.
Copyright 2017. Part of this content contributed by Forefield, Inc.