January 17, 2018
2018 State of the Market
A new year has arrived, and with it comes a sense of new beginnings, great potential, and a clean slate. It is the time for resolutions and resetting expectations, yet, as we all cast our gaze forward to what 2018 will bring, it is also the time for a wave of “market outlooks” to be unleashed upon investors. Isn’t that what every investor wants – a succinct guide for the coming year complete with predictions, target prices, and a ready-made portfolio to beat the market? But as we have communicated so many times before, it’s hard enough to anticipate where the ever-shifting global market machine will be 12 days from now, let alone 12 months! Just think back to where we were at this time last year. If there was one thing that every strategist and pundit knew was going to happen in 2017, it was that we were in for a wild, volatile ride with the “unpredictable” Donald Trump moving into the White House. So, naturally, what happened? Why, of course, we got the lowest volatility year on record by several measures and the S&P 500 never fell more than 3% at any point. Try predicting that! We certainly didn’t, even as optimistic as we were about the secular bull market.
Consistent with this view, instead of trying to make a bunch of dart throws for what stocks will do in 2018, we think a better exercise is to use a dynamic asset allocation model-based approach that analyzes current conditions to identify the dominant trends in place, and then adjust accordingly throughout the year as those trends change. And many of the trends will certainly change, which is why we anticipate rebalancing multiple times instead of just once per year. Proceeding this way helps to avoid becoming married to a prediction despite possible evidence to the contrary, as well as making confirmation bias less likely, where you only seek out information that supports your prediction.
With that said, while we have no idea where the S&P 500 or any other market will finish at the end of this year, we do enter 2018 once again optimistic and not really seeing the red flags that would cause us to worry about the health of the secular bull market except for the extremely high bullish sentiment. Most of the major averages remain at or near their all-time highs, as well, and the sectors leading the market are the ones we want to see leading. However, the odds do favor seeing increased volatility this year compared to last, though of course, it won’t take much in terms of price swings to make that statement true given the extremely calm market of 2017. As a result, the key to performance in 2018 may be to not panic when volatility does pick up at some point. The fear is that investors have become too complacent and will then be shocked into selling once the market starts going down in earnest for the first time since early 2016. But, as long as the weight of evidence continues to support the secular bull market, we think any dips will still be for buying.
There are risks, of course, but that never ceases to be the case. Valuations remain stretched for various reasons, which does allow for less margin for error should conditions start to turn. This may motivate investors to sell out more quickly than they otherwise would. Corporate earnings and most economic indicators will also have a higher bar to overcome this year than last, though the hope is that the tax cuts and synchronized global growth will continue to push these measures of health above their year-over-year comparisons. Consequently, the bottom line is that stocks appear to be set up nicely for more gains in 2018, but we do still recommend remaining flexible and taking a more active approach just in case that outlook changes.
Gainplan LLC is a Registered Investment Adviser. This blog is solely for informational purposes and not a solicitation to invest. Advisory services are only offered to clients or prospective clients where Gainplan LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Gainplan LLC unless a client service agreement is in place. Please contact a financial advisory professional before making any investment.