A Long but Not Wild Ride in 2017

 

If I had to compare 2017 in the markets to one thing, it would be a roller coaster that kept rising with few dips or drops.

That meant fewer thrills and chills for sure, but it certainly made investors richer.

As I write this, my last market commentary of the year (we’re taking next week off), the Vanguard Total Stock Market Index ETF (VTI) had risen 21% for the year, while the Vanguard FTSE Developed Markets ETF (VEA) was up a bit more, 24% through Thursday.

Emerging markets and technology stocks did even better: The iShares MSCI Emerging Markets ETF (EEM) has gained 33% while the Technology Sector SPDR ETF (XLK) has advanced 36% thus far in 2017.

It was, in short, a good year to take risk, and the CBOE Volatility index, the VIX, reflected that. It spiked three times this year above 15—in April, May, and August—but didn’t stay there long. What I call the market’s complacency index spent most of the year near historic lows, in single digits. As I write this, it’s around 9.5.

So, should we all just relax and count our profits?

Maybe for a while. Jerome Powell, who will start his term as Federal Reserve chair in February, has vowed to continue current chairwoman Janet Yellen’s policies of gradually raising interest rates and slowly shrinking the Fed’s balance sheet. So, unless inflation heats up, I don’t expect the central bank to raise rates more than three or four times next year.

Also, the global economy is picking up steam and that’s boosting U.S. growth. GDP rose 3.3% in the third quarter, according to the latest estimate by the Commerce Department. It’s hard to know how much the corporate tax cuts passed by Congress will spur GDP growth over the next few years (economists think it will provide only a modest boost). But they will likely increase corporate profits by as much as 10% a year. That’s a definite tailwind for U.S. stocks.

So, I don’t see any signs of recession and if there’s inflation, it’s likely to occur later in 2018.The big internal risk to the markets is complacency, euphoria, and speculation. We’ve already seen glimpses of that in the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Alphabet, parent of Google); in the $450-million purchase of a purported Leonardo by a Saudi prince, and of course, bitcoin and other crypto-currencies. I don’t think a bitcoin bust will spill over to the general market, and there’s already a rotation away from technology and the FAANGs.

The biggest risk is geopolitical, which investors are ignoring and which can’t be quantified anyway. North Korea, of course, is the biggest threat, with potentially cataclysmic consequences. But don’t ignore Iran, Saudi Arabia (where a missile from Yemen almost hit the royal palace in Riyadh a couple of weeks ago), or other oil-rich tinderboxes. That could provoke a nasty, overdue selloff, but a real bear market appears very unlikely now.

Have a happy holiday season and a healthy, prosperous New Year! See you in 2018!

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