January 11 2018 Market Update
In our first newsletter of 2018 we want to review 2017 and present our expectations for 2018. Let’s start by reviewing what we have learned from 2017.
We must first return to November 8, 2016, the night of the US Presidential elections. As news started coming in about Donald Trump’s ascent to the Presidency, we at JSF started to re-evaluate the impact of that night’s dramatic outcome on the economy and financial markets. The narrative was that President Trump would be impossible to predict, and that his unexpected approaches to the many world challenges could induce much volatility onto financial markets. His initial promises to raise tariffs and tear up trade deals did not bode well for global trade. The expectation was for a Brexit Moment, i.e. a sharp and meaningful decline in the prices of risk assets, akin to the stock market’s reaction to the unexpected decision of Britons to withdraw from the European Union on June 24, 2016, when the S&P 500 Index dropped approximately 5.3% over the two days following the Brexit referendum.
We now know full well that things did not turn out that way following the US elections of 2016. The S&P 500 Index, which closed at 2,139.56 on November 8, 2016 (Election Day), was up slightly the next day, finished 2016 at 2,238.83; and by the end of December 2017 was at 2,673.61. Indeed, an investor buying an ETF tracking the S&P 500 Index on Election Day would have been up 5.0% by the end of 2016, and another 21.1% in 2017, for a grand total of 27.2%; all including dividends and distributions. So much for a Brexit Moment. There are plenty of excellent hindsight explanations for both the pre-election consensus (which was proven wrong) and the post-election appetite for risk assets; we have outlined some of these explanations in prior newsletters. The number one lesson we have taken from 2017 is that one should take every financial prognostication, including the one you are about to read, with a huge grain of salt. Things just have a way of working out the way they please.
2017 proved to be a banner year for equities. Large-cap domestic equities, such as those in the S&P 500 Index, were up by 21.1%. Foreign investments outpaced their domestic brethren: Developed markets equities were also up; an ETF tracking the MSCI EAFE Index was up by 25.0% in 2017, including dividends and distributions. Both were handsomely bested by an ETF tracking the MSCI Emerging Markets Index, which was up by 36.8% in 2017, including dividends and distributions. Indeed, this was a very good year for risk assets. On the fixed–income side of the financial markets there was a different story. The yield on the 10-yr US Treasurys closed 2016 at 2.45%, a dramatic move up from the 1.86% on Election Day. The 10yr Treasury yield moved up and down throughout the year, but closed 2017 at roughly the same place where it started it, at 2.40%. An investor buying an ETF tracking the Barclays Aggregate Index would have realized approximately 3.7% in 2017, including dividends and distributions.
Looking out to 2018, market participants are talking about “global synchronized growth” where all 45 nations tracked by the OECD are expected to see their domestic economies grow this year. At the same time, the same market participants are well aware that the S&P 500 Index is trading at about 20 times the next 12 months’ earnings, which might not be overvalued but is certainly not considered to be historically cheap. We think the key question for deciphering the coming year is which of these two- steady economic growth globally or expensive equities, will have a stronger impact on financial markets in 2018.
On the monetary side, Jerome Powell was nominated to replace Janet Yellen as Fed Chair, was approved by the Senate Banking Committee and is waiting for the full Senate confirmation before he assumes his new job on February 3, 2018. Powell is seen as a “more of the same” Fed chair whose policies will not be much different from Yellen’s, and the Federal Open Market Committee (“FOMC”) is expected continue to reduce its balance sheet by not reinvesting $10B/Mo. in bond coupons and by hiking short-term interest rates another 3 times in 2018. The Fed has recently been discussing the implications of the 2017 tax reform on its monetary policy, recognizing that increased economic growth due to the reform might cause it to hike interest rates faster than previously forecasted.
Two other key questions are also on our mind. The first is related to political and geopolitical (e.g. North Korea, Brexit, and South China Sea) developments: how will such events affect the global economy and will they harm the global synchronized growth? What will be the effect on financial markets? It is fair to say that despite concerns from various quarters and many developments on the political and geopolitical fronts, neither had a strong impact on the economy and financial markets in 2017. Will that trend continue in 2018?
The second question is related to the length of time since the last meaningful correction. Pundits often say that “we are due for a correction,” but is that so? Maybe we will learn the answer to that question in 2018, but we expect greater volatility in 2018 than we saw in 2017.
There are many questions regarding the tax reform act and we are trying to figure out the new regulations and their impact on all of us. However, we continue to believe that the best approach for long-term investors is having a diversified portfolio (one that represents all the relevant asset classes) that is carefully tailored to the risk profile and objectives of each individual investor.
We would like to take this opportunity to welcome the newest member of the JSF Financial family, Seta Keshshian. Seta will be getting to know many of you as she settles in as an Associate Financial Planner. Please drop by to say hello when you visit our office.
On a bittersweet note, JSF will be saying farewell to our beloved Financial Planner Don Peck, who is retiring at the end of January. Don joined JSF over 12 years ago after retiring from a successful career at Disney Imagineering. Don has proven to be a superb listener and a valuable resource for so many of our clients. Don will sorely be missed but we know he will enjoy traveling and exploring the great outdoors as he embarks on this next chapter of his life.
We thank you again for your continued confidence, and ask that you let us know if there have been any changes to your financial situation or objectives so that we can review your portfolio and ensure that your financial needs are being addressed.
We look forward to our next review meeting with you in early 2018.
Securities are offered through Mid Atlantic Capital Corporation (“MACC”) a registered broker dealer, Member FINRA/SIPC.
Investment advice is offered through JSF Financial, LLC, which is not a subsidiary or control affiliate of MACC.
Confidentiality Note: This email communication including all attachments transmitted with it may contain confidential information intended solely for the use of the addressee. If the reader or recipient of this communication is not the intended recipient, or you believe that you have received this communication in error, please notify the sender immediately by return email or by telephone at (323) 866-0833 and PROMPTLY delete this email including all attachments without reading them or saving them in any manner. The unauthorized use, dissemination, distribution, or reproduction of this email, including attachments, is strictly prohibited and may be unlawful.
The information expressed herein are those of JSF Financial, LLC, it does not necessarily reflect the views of Mid Atlantic Capital Corporation (MACC). Neither JSF Financial LLC nor MACC gives tax or legal advice. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation or recommendation for the purchase or sale of any security. Investing involves risk, including possible loss of principal. Indexes are unmanaged and cannot be invested in directly.
Historical data shown represents past performance and does not guarantee comparable future results. The information and statistical data contained herein were obtained from sources believed to be reliable but in no way are guaranteed by JSF Financial, LLC or MACC as to accuracy or completeness. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy. Diversification does not ensure a profit or guarantee against loss. Carefully consider the investment objectives, risks, charges and expenses of the trades referenced in this material before investing.
S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market.
SPY- ® S&P 500® ETF is a fund that, before expenses, generally corresponds to the price and yield performance of the S&P 500® Index. The shares of the SPDR S&P 500 ETF represent ownership in the SPDR S&P 500 Trust, a unit investment trust. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
EFA- The iShares MSCI EAFE Index Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in the European, Australasian, and Far Eastern markets, as measured by the MSCI EAFE Index (“the Index”). The Index has been developed by MSCI Inc. as an equity benchmark for international stock performance. It is a capitalization-weighted index that aims to capture 85% of the (publicly available) total market capitalization. Component companies are adjusted for available float and must meet objective criteria for inclusion to the Index, taking into consideration unavailable strategic shareholdings and limitations to foreign ownership. MSCI reviews its indexes quarterly.
EEM- The iShares MSCI Emerging Markets ETF seeks to track the investment results of an index composed of large- and mid-capitalization emerging market equities.
10-year treasury note- is a debt obligation issued by the United States government that matures in 10 years. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.
AGG – iShares Core US Aggregate Bond is an investment seeks to track the investment results of the Bloomberg Barclays U.S. Aggregate Bond Index. The index measures the performance of the total U.S. investment-grade bond market. The index includes investment-grade U.S. Treasury bonds, government-related bonds, corporate bonds, mortgage-backed pass-through securities, commercial mortgage-backed securities and asset-backed securities that are publicly offered for sale in the United States. The fund generally invests approximately 90% of its assets in the bonds represented in the index and in securities that provide substantially similar exposure to securities in the index.
 See, for example: https://www.forbes.com/sites/greatspeculations/2017/11/20/synchronized-global-growth-may-have-arrived/#6860500c37f3; https://www.axios.com/extraordinary-2017-trend-synchronized-global-recovery-2519077040.html; and https://realmoney.thestreet.com/articles/01/02/2018/u.s.-stock-market-still-fairly-sweet-spot-market-recon