The fourth quarter of 2017 capped a very strong year for US equity returns. Incredibly, the largest peak-to-trough move in the S&P 500 was just 2.8%, making 2017 one of the least volatile years ever. Since 1937, the S&P 500 Total Return Index has averaged more than one 5.0%+ pullback per year off unique 52-week highs, so the lack of any significant market decline since February 2016 is not normal. While we remain cautiously optimistic, we want to remind our clients of this fact so when the next pullback does inevitably come, it does not arrive as a shock. It is simply a normal part of investing in equities, and disciplined long-term investors should stay the course at their target risk level. As we look ahead into 2018, these are a few key topics and events we will be focusing on:

  • Corporate Earnings: The upcoming Q4 2017 corporate earnings season will be extra complicated this year due to the passage of tax reform. Companies will be recording large one-time charges on international earnings and deferred tax assets, but the main question and focus is on 2018 guidance – do companies believe they will realize the full net earnings benefit that tax reform promises, or will most of the benefit be competed away through a combination of lower prices and higher wages?
     
  • US Politics: With tax reform complete, the market’s focus will quickly turn toward the 2018 midterm elections this November, where Republicans will be trying to keep control of the House and Senate. Congress may attempt to pass an infrastructure bill or entitlement reform in 2018, but neither is expected at this point.
     
  • Global Economic Data: US economic data has been strong recently, with most metrics and surveys pointing to solid growth and a labor market at or near full employment. Global indicators have also been encouraging, most importantly in China and Europe. Whether these positive trends persist will be key to market performance in 2018.
     
  • Interest Rates: While interest rates globally remain historically low, the Federal Reserve has signaled three more rate increases for 2018 in its most recent forecast, and the European Central Bank and Bank of Japan are both likely reducing their bond buying programs. Investors should welcome this slow policy normalization path, as it signals confidence in the economy and gives central banks more tools to use during the next recession. On the other hand, with global debt levels at or near all-time highs for most governments, consumers and businesses, interest rates can only rise so far without causing widespread repayment issues, especially if economic growth stalls.
     
  • International Relations: North Korea of course remains a physical threat, but the market is more worried about how this will impact US/China relations and trade policy, as President Trump works to get Beijing to do more to curb the crisis. Talks with Mexico and Canada regarding the future of NAFTA will also be closely watched.