As hard as it may be to believe, there are just 9 trading days remaining in 2017. Most notable is that through the first 242 trading days of this year, the worst S&P drawdown was a benign -2.8% decline. That hardly-sinister setback is the second skinniest calendar year correction ever (1995 was the narrowest). And the S&P maintains a perfect calendar-month winning streak through November. The 2nd full week of December continued the upward melt theme of 2017 with the S&P climbing on 3 of the 5 trading days and adding a little more than +0.5% for the week. In that vein, it would seem to be an easy statement to say that 2018 is likely to contain more uncomfortable moments than witnessed in the last 12 months.
From an economic perspective, the biggest news so far in December is that the US economy appears to be building on its 3Q momentum. With both stock and home prices well-higher YTD, measures of consumer confidence continue to hover near attractive high levels. In that regard, it is not surprising to learn that nominal retail sales were up +5.8% over last year in November; a much faster pace than the +4% rate enjoyed in recent years and setting the stage for 4Q GDP to be up an estimated 4% after backing out the effects of inflation (which is still quite tame, but perhaps starting to show some signs of life). And strength should beget more near-term strength; in the last 20 years there is an 85% correlation between the YTD performance of the S&P and holiday sales; with that in mind it suggests holiday sales could be up 7% over last year. As indicative as that all is (healthy consumer tends to lead to more confidence by businesses as well) the big news is actually that the tax reform bill looks set to be passed by Republicans before year-end. We realize that there are conflicting views on the appropriateness of any of the many changes contained in the bill (any legislation that purports change will always create marginal winners/losers), and are not offering an endorsement or opposition in that regard; but the body of work we read and receive on that subject suggests that on balance it (corporate tax changes in particular) will be accretive and boosting of the economy in at least the short-term (next few years). And, a strengthening economy generally has positive implications for financial markets as well, all else equal.
As offered in the opening, 2017 has been a fantastically encouraging year for those who remained disciplined and invested over the interval despite no shortage of negative media. Calm, low volatility, has been a hallmark of the last 12 months; so calm in fact that it will go down as one of the least volatile years ever. In that regard, 2018 should offer more bumps. The question in the most immediate term is whether the final trading days of the year will add to what is already a great performance, or if Santa has already done his giving for 2017? With eyes toward what 2018 might offer; despite valuations being perhaps worrisome, the economic and fundamental picture continues to look supportive in the coming 12 months. [Bitcoin: hard to imagine that it will experience an ongoing run without a significant crash at some point!] Internationally, we were also pleased to see allocations rewarded as foreign economies appear to have moved into a more stable growth pattern and look to be at the earlier stages of their recovery than the US. In that regard, they may continue the market-leading performance observable throughout the last year into 2018 and beyond.
Most important, we wish all of our clients and their families the Merriest this Christmas! We look forward to visiting with you as we turn the calendar to a New Year!