“Money is like soap. The more you handle it, the less you will have.”
Famed American Economist, Eugene Fama
Happy New Year to all!
If I had written in early November 2016 that:
- Donald Trump would be the president of the United States
- He would win the electoral college by a wide margin, notably by winning states that has been Democratic bastions for decades
- That the US stock markets would explode higher and hold those gains
- And do it in one of the lowest periods of volatility in US markets history
People would have thought… well… Vito has finally gone off his rocker.
… but, that is EXACTLY what happened in 2017 (all but the Vito part that is!).
In a year marked by historically low volatility, only 5% of trading days with moves in the S&P 500 of 1% (in either direction), by far the lowest since 1982 when the data began to be recorded. Compare that to 2008 when there was only one single trading day (Dec.24, 2008) with an intraday range of less than 1%, it truly is incredible. While doing that, it put on 62 new closing highs as well.
2017 also ranks right up there of rallies without a 5% correction:
Source: Bespoke Investment Group
The Dow Jones had its best year since 2013 with a 24% gain. The S&P 500 was 19%, and the tech laden Nasdaq left both of them behind, with a surge of 28%. While those numbers were great, a Canadian investor would have given back between 6% and 15% of their gains during the year on currency as the Canadian dollar gained.
Speaking of the TSX, it was negative for almost ¾ of 2017 and managed to eke out a 5.4% gain by year end. The year 2017 was the 7th consecutive year that Canada underperformed the USA. In past cycles, Canada typically underperforms in the recovery stage of the economic cycle, and always outperforms in the back half of cycles, the expansion stage, and I think that’s where we are headed.
The last cycle for commodities ended around 2007-2008, and that cycle was driven by an increased demand story (mainly out of China). I believe the next commodity cycle will be driven by a lack of supply story.
There is a reflation story taking place, led by Trump’s policies in the USA, but it is happening in Europe, China, Japan, Emerging Markets, and even Canada. In 1981, the 10 year US Treasury hit 15%, hit a low of about 1.40% in July 2016, and closed out 2017 at 2.40%. I’ve said before I believe the Fed (and central banks in general) will end up chasing inflation.
The global economy continues to recover and global synchronized growth seems to be gaining momentum, but we may be at a turning point in terms of monetary policy on the part of the central banks. The rising tide of the massive quantitative easing (QE) is about to end and liquidity will begin to exit the system, and that will be one of the catalysts which will impact 2018 returns.
Under President Trump tax reform package it would logically make sense to believe corporate profits will explode. Business confidence is at the highest level in decades, both by small business and large, and quietly the new administration has deregulated a lot of legislation which hampered growth and investments and improved productivity gains.
So, in summary, what are the key takeaways for 2018?:
- Corporate capital expenditures should accelerate, particularly in manufacturing, technology, transportation, utilities.
- As the economic expansion continues, the need for Central Bank (QE) will be reduced. Tighter money supply is not always bad for markets, as long as economic growth can offset it.
- Global merger and acquisition (M&A) should pick up.
- Interest rates will rise but still remain lower for longer so no policy errors can be blamed on Central Banks.
The risks for 2018? For the most part, pretty well the same ones we’ve been hearing since the 2008-09 Great Recession:
- Trump bites off more than he can chew.
- Inflation takes off too fast and run into Monetary Policy crisis.
- World Event Risk: North Korea, Russia, Terrorism, Saudi Arabia, Iran, Syria.
- Cybersecurity.
- Currency surprises.
- Mixed outlook for commodities.
- Debt levels out of control (auto credit market especially so).
- Brexit doesn’t go well.
- China goes into a crisis.
- The impact of Millennials coming of age.
- Cryptocurrency implosion.
- Real Estate crisis in Australia, Sweden, Canada, or all of the above.
- Euro bond market implodes.
- FANG stocks collapse.
- Pension fund blow up in the USA.
I know, I know it’s a long list. But they say bull markets climb walls of worry. We will continue to do our best to figure it all out.
Let’s hope 2018 brings everyone health, happiness and prosperity.
Stay tuned,
Vito Finucci, B.COMM, CIM, FCSI
Vice President and Director, Portfolio Manager
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