“Wall Street’s Forecast is the Most Bearish Annual Outlook in 12 years.” was the headline on January 3rd. “Wall Street’s S&P 500 forecast calls for little more than a 5% gain, the smallest increase predicted since 2005.” continued the article. What is most noteworthy of this somber prediction is that it was the headline from last year on January 3rd, 2017.
Analysts, like weathermen, are used to being proven wrong, but not often to this degree. Global markets rallied powerfully in 2017 fueled by profit growth and bullish economic data. Earnings were up 17% and US markets enjoyed double digit returns. International stocks rallied even more, led by emerging markets. Pundits, with the benefit of hindsight, are looking back and dubbing 2017 the Year of Optimism.
Optimism, in our opinion, has been brewing in the data for several years. In fact, last year in our January newsletter we suggested the following,”
We were particularly encouraged to see that 2017 brought sales growth and profit growth for U.S. and International businesses alike. This occurred despite Washington rancor, Brexit talks, and North Korean missile tests. We were pleased that Wealthquest portfolios were well positioned last year and our clients have been rewarded for maintaining a globally balanced allocation.
One cannot deny that the Tax Reform Bill of 2017 has played a strong part in fueling the recent optimism. By most accountants’ math, the lower personal tax brackets and expanded standard deduction will put more money in people’s pockets. This, in turn, could drive consumer spending and we may see the highest GDP growth in over a decade. Furthermore, the corporate tax cuts could yield a 10% to 15% boost to earnings for U.S. companies and support higher stock prices.
As we consider the outlook for our stock portfolios, we believe the data is favorable for both U.S. and foreign markets. Valuations still point to more opportunity in the international markets and we’re pleased that our managers have performed well there. Look for us to take another step towards increasing our foreign allocation as we rebalance portfolios in the coming months. Last year was one of the most docile markets on record, with 22 of the 25 calmest trading days ever recorded. For 2018, we could see more bumps in the road as volatility returns to normal. Changing Fed policy could add to the ups and downs but does not spell an end to optimism. Either way, we will be watching the data for how long this economic cycle will last.
On the bond side of the ledger, our managers have done a good job navigating this environment. The prospect of interest rate hikes from the Federal Reserve will continue to temper bond returns. If the economy gains steam in 2018 as predicted, the Fed will likely raise rates several times. Interest hikes put pressure on bond prices and mute returns. We expect to continue our strategy of using buffered notes in an effort to enhance the return of the fixed income portfolio.
Thank you as always for the continued trust and confidence you place in our services. We invite your comments and questions regarding this material or your portfolio in specific.
Steve King is the Chief Compliance Officer at Wealthquest – a Cincinnati based financial planning and wealth management firm that offers a full range of financial services under one roof, for one simple fee.
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