Let’s take quick inventory of 2017 investing, then discuss what makes sense in this stage of the current strong bull market. Here are some calendar-year results by major indexes and sectors:
• NASDAQ 100 – up 32.0 percent.
• Dow Jones Industrial – 28.1 percent.
• S&P 500 – 21.8 percent.
• U.S. treasuries, intermediate – 1.1 percent.
• U.S. Agg. bonds – 3.5 percent.
• U.S. high-yield, 7.5 percent.
• Information technology – 38.8 percent.
• Materials – 23.8 percent.
• Energy – down 1 percent.
• Telecom services – down 1.2 percent.
You can see that the major stock indexes rose well, actually exceeding expectations by all but a few of the most optimistic predictions. Also you should note there is quite a bit of difference between highest- and lowest-performing business sectors. If your allocation was 100 percent stock in major energy and telecom, a traditionally conservative portfolio, you probably had a lousy year except for dividends received. If it was 100 percent in major information technology, you had a fantastic year.
And so it will be in 2018. Some sectors of business will far outperform others. It is a market of individual stocks and bonds even though there are always elephants and mice.
By the way, small companies in general underperformed. So did those on the value side, those cheaper by fundamental measures like earnings per share (PE).
We still believe most stocks are not priced too high at the moment, considering the ramping up of business attitudes and activities. Trying not to be too politically incorrect, the Obama years made many business owners and managers feel that they had a big circular target on their backs, rightly or wrongly. They now are more willing to stick out their necks and spend money to expand and grow their businesses.
But trees do not grow into the sky and this bullish stock market trend will also end and correct at some point. In 2017, a record was set – at no time did the S&P 500 drop back by at least 5 percent. That actually has not happened since June 2016. It is easy to predict that low volatility will not continue.
Since world economic engines are almost all increasing in speed, perfection seems to be baked into the cake. When people who have been out of stocks since the last decade finally get tempted back in and some are quitting their day jobs to trade stocks for a living, some bits of bad or disappointing news will change the trend. We are extremely wary and ready to change our allocation to defensive.
If you are a long-term buy-and-hold stock investor, stay asleep and awaken about 2028. All should be well. If you are a long-term buy-and-hold bond investor, you had better wake up now and prepare to find other sources of income unless you do not care about your principal loss. The last bond bear market lasted from 1946 to 1981.
Hopefully, Mr. Market will sell off by 5 to 10 percent in the middle of the year and finish up again with a strong fourth quarter. Statistically, that is the pattern for the second presidential year. We make it a point to be ready for anything as it develops. We wish you all a successful 2018 financially.
(Past performance is no guarantee of future results. Advice is intended to be general in nature. Performance numbers for 2017 from Bloomberg cited by First Trust Market Watch, First Trust Advisors, L.P., 1/2/18.)
Ron Finke is president of Stewardship Capital in Independence. He is a registered investment adviser. Reach him at firstname.lastname@example.org.