Market Commentary: Year-End 2017

By: Matt Garrott

What Happened in 2017

 Experts predicted that 2017 would be a difficult year for investors.  Looking back, they are now calling it an easy year.  All investors had to do was stay invested, but how ‘easy’ was that?  Half of a year-end Barrons roundtable of investment experts predicted S&P 500 returns of 5% or less.  News headlines were dominated by tragedy (multiple natural disasters) and political uncertainty.

Low volatility was the investment theme of 2017.  The S&P 500’s largest drawdown of 2.6% is extraordinary against its average annual drawdown of 14%.  The index closed at record highs on 62 days and was up for every month of the calendar year for the first time in its history.  The S&P 500 has been up for 9 consecutive calendar years (kind of – 2015 was negative if you don’t count dividends).  Just like every year, 2017 was supposed to be a stock picker’s market.  Like most years, however, the S&P 500 beat the majority of active managers, this time outperforming 73% of the competition.

The S&P 500 was boring as it never moved more than 2% in a day this year.  Meanwhile, some tech advancements were literally boring (Elon Musk’s excavation company is called The Boring Co.) as digging began on a hyperloop project in Maryland.  Other Musk-related tech stories include the launch of unmanned trucks and regular successful SpaceX missions.  Cryptocurrencies dominated financial headlines during the last quarter of the year as the price of Bitcoin skyrocketed.  It remains to be seen whether this is a breakthrough in financial technology or just a solution in search of a problem.

News headlines and social media were a battleground for some, but 2017 was also a year that brought us together.  The nation turned its eyes to the sky to witness an eclipse.  Support for our fellow Americans impacted by natural disaster was swift.  One of Google’s top searches this year was “How to help…’

2017’s Buzzwords:  Trump, New All-Time High, Bitcoin, Solar Eclipse, Automation, Machine Learning, Populism, Tax Reform, Equifax

Outlook for 2018

This year’s Barrons brain trust predicts the S&P 500 will be anywhere from flat to up 15%.  Official 2018 outlooks from financial institutions seem to agree on low-to-mid single digit returns.  Experts are approaching this year with reluctant optimism.  It is unlikely we will have a repeat of 2017, but there are few obvious roadblocks in the coming year.  As always, we feel that investors are best served by a diversified portfolio which eliminates the need to rely on market predictions.

There are fewer calls for a correction this year, but remember that in an average year the market experiences a correction of about 14%.  Rather than fear a correction, expect one and welcome it as an opportunity to rebalance and harvest losses. One thing that we agree with the experts on for 2018 is that it will be important to be disciplined in the face of extreme headlines.

2017 ended with tax reform being signed into law.  We will see what effect this has on the economy and markets, but what is certain is that there is plenty of new tax and financial planning work to be done.  Now is a good time to revisit risk tolerance if you have not done so recently.  This probably shouldn’t be an adjustment upwards, but a recognition of marginal utility.  How much risk do you NEED to take to meet your financial goals after yet another positive year?

As is consistent with our philosophy, we continue to focus on controlling what we can control, embrace an open architecture approach, and create customized, elegant portfolios for our clients.  Portfolio rebalancing and tax loss harvesting will continue to add value without having to be “right” about any predictions.  A portfolio diversified across asset classes continues to be the most prudent way to protect against risks in the market.  While much of our attention is on risk, we are also looking for opportunities.

Our investment committee will meet early in January to review our base allocation models and benchmarking.  We’ll be discussing those updates with you during our next set of meetings.

Fairway Scorecard 12-31-2017