Key Points
  • A better-than-expected 2017 appears to be morphing into a solid start to 2018, but it is unlikely to be as smooth a ride. We believe the bull market still has room to run but it could shape up to be a bumpier ride as expectations and sentiment are elevated.

  • U.S. economic growth appears to be picking up, but with the Federal Reserve tightening policy and inflation likely to heat up, we appear to be in the latter stages of the cycle.

  • Global markets are also poised to have an unprecedented year of performance; which is unlikely to be repeated, but conditions around the world still look largely supportive of further gains.

What a Year!

The year is in its waning days and barring a bombshell in the last couple of weeks, 2017 will go down as one of the most remarkable on records. Few investors expected the S&P 500 to post gains of close to 20% with near-record low volatility while enduring geopolitical tensions, massive natural disasters, political infighting in Washington, and a tighter monetary policy. This year has demonstrated why it can be detrimental under-exposed investors to wait for a pullback. As of this writing, we are in the longest period in S&P 500 history without a 3%+ correction, with no move of that size since November 4, 2016. Another mark of the steadiness of the market in 2017 has been the attention the small pullback we’ve seen lately has gotten—with some media pundits asking whether this marks the beginning of the end. We remain in the no camp, and believe that any pullback or correction would be a healthy development in the context of an ongoing secular bull market.

A smooth ride in 2017

S&P 500 YTD

Source: FactSet, Standard & Poor's. As of Dec. 5, 2017. Past performance is no guarantee of future results.

VIX

Source: FactSet, Chicago Board Options Exchange. As of Dec. 5, 2017.

But while we think the bull market still has room to run and investors should remain at their long-term strategic equity allocations, it can be easy to get complacent after a year like this.

2018…Great Expectations

We believe the typical Wall Street exercise of publishing year-end stock market targets is of little value to Main Street investors, so we don’t dive into that pool. But we do believe that the secular bull market is intact as we conclude this year, but we expect a bumpier ride in 2018.

The U.S. economy has picked up steam; with back-to-back quarters of 3%+ growth and the Atlanta Fed’s GDPNow showing an estimated 3.2% growth in the current quarter. Additionally, the employment picture is healthy, with claims near record lows, unemployment at 4.1% and solid 228,000 jobs being added in November, according to the Department of Labor. Further, business and consumer confidence is booming, both the manufacturing and services Institute for Supply Management’s indexes show robust growth, and the Index of Leading Economic Indicators continues to rise. Housing is also picking up again, with housing starts rising nearly 14% last month (Census Bureau), and existing housing inventory is down over 10% year-over year (National Association of Realtors).

Confidence is booming

Consumer confidence index

Source: FactSet, Conference Board. As of Dec. 5, 2017.

ISM readings remain elevated