2018 Outlook – VETS Indexes

(January, 2018)

The market, as measured by the S&P 500, is off to a very strong start, up 6% YTD and looking to build on the impressive gains of 2017.

The fact that the S&P 500 is above five percent is a meaningful indicator for continued opportunities. Since 1950, when $SPX is up greater than five percent or more for January, the full year has finished in the green twelve out of twelve times with an average gain of 24.8%. The final eleven months closed higher eleven out of twelve years with only 1987 being the outlier.

Another indicator of growth is the momentum factor within the market. The $SPX hasn’t closed below its 40 week moving average in almost two years as highlighted below; certainly, a sign of strength.

As the old market saying goes “it’s not ‘the news’, but the market’s reaction to the news that matters” and that was certainly the case for 2017. Looking back at the past year, there was plenty of headline risk both at home and abroad. These risks certainly had the potential to derail the upward momentum that market participants enjoyed during the year. There was a plethora of negative headlines to grasp, however, true to a bull market, the indices climbed a wall of worry.

As we look ahead for 2018, many of the same headwinds exist along with new and potentially more difficult obstacles to navigate:

  • First, there is geo-political risk with Iran and the Middle-East region as a whole, especially with Turkey taking a more aggressive stance towards the Kurds. We continue to see North Korea act defiantly in the face of UN sanctions. Developments in the South China Sea should definitely be on one’s radar as well. For the first time in 16 years, global terrorism is not the CIA’s number one national security risk as China and Russia have been elevated to that position. Of course, here at home, there is still bipartisan brinkmanship which always gets ample media attention.
  • As we direct our attention more to market specifics, valuations are by no means “cheap,” but that has been the case for several years and earnings continue to grow strongly. With that in mind, market multiples have never been the cause of a bear market. Remember, it’s the market participants who decide on prices to buy and sell and at present, they are willing to pay for higher multiples. Last year, volatility was extremely tame which contributed to stocks going a record 395 days without seeing a 5% reversal. Can this last? We think that a certain level of volatility could arise and transition stocks to a wider trading range. This wider trading range would be welcomed by active investors and also allow for those underinvested to potentially add to their equity exposure. Hence, we believe the market continues on its upward path until proven wrong.
  • As for interest rates, we look to the Fed to continue their gradual hiking of the Fed Fund rates and also allow for their asset balance to shrink as debt holdings mature and roll off the balance sheet. The yield curve continues to flatten going out past ten years, but remains positive. We believe that unless there is an inversion to the yield curve, this is only something to monitor for one’s fixed income exposure. We believe with global interest rates at historically low levels and US Treasuries offering a relative high yield to other sovereign debt, demand for US debt will remain strong, putting a cap on interest rates in the debt market.
  • A few critical, thematic trends that we include the following:
    • We see are the continuation of growth within Blockchain and crypto-currencies.
    • We believe healthcare will continue to be a place of mergers and acquisitions as R&D has given way to acquiring patents and pipelines.
    • We look for the continuation of strong inflows to ETFs to be the product of choice among retail investors and especially the younger generations of investors. Last year, we saw this strategy being adopted at the institutional level as well and believe exchange-traded-products will continue to grow as an investment vehicle of choice for certain types of exposure by this group.
    • Lastly, it is our belief that more and more investors care about the ethical impact of their investments in addition to performance. Hence, we look for ESG (Environmental, Social and Governance) and SRI (Socially Responsible Investing) investments to grow among the investing landscape and continue to be further defined as categories.

Thank you for reading and we look forward to checking in on 2018 with our mid-year review!