Happy New Year! 2017 saw the S&P end up 21.83%. In light of a such a strong showing, I’ve been asked if I believe the rally can continue. In short, my answer is yes. But perhaps not quite as much as 2017. From an economic perspective, indicators like Auto Sales, Housing Starts and the ratio of Leading to Coincident Indicators are all at or near cycle highs. Historically, even when they peak, recessions tend to be about a year off. Valuations are running high, but stocks are seeing re-ratings as a result of tax reform. Even still, higher valuations usually aren’t a catalyst for a market move. So unless there is a catalyst, valuations are not a good timing indicator.
From a market perspective, the internals seem solid as well. For instance, market breadth remains positive. Every S&P 500 Industry Group is trading above its 200 day moving average. In the ten other periods when this occurred since 1990, the S&P was higher three, six, and twelve months later every time. Also, when markets finish up over 20%, the subsequent year tends to deliver double digit gains. We’ve all heard the saying “Bull markets don’t die of old age and they don’t die because of valuations”. Usually their demise is the result of an economic downturn or some exogenous shock. The former doesn’t seem to be in the cards and no one can predict the later. With that being said, the market seems to be in a position to have another good year.
A few notes on 2017;
Energy and Telecom were the only two sectors down;
Large stocks outperformed small stocks (The 50 largest stocks gained 19.42% vs. the 50 smallest which gained 7.21%)
Growth outperformed Value
2017 was the 9th straight up year, which ties the streak from the 1990’s (91-99).
Low dividend stocks outperformed high dividend stocks
Stocks with heavy international exposure did better than domestically oriented names; Stocks with heavy intl exposure were up an average of 33.84%
Near record low volatility with only 8 one-day moves of +/- 1% (The last time that happened was in the mid 60’s!)
409 calendar days without a 3% pullback
539 days without a 5% pullback
676 days without a 10% pullback (second longest stretch on record)
As always, please feel free to call with any thoughts or questions.
Andre