2017: A year for the record books for the global stock market!! Global stock markets were up 13-25% depending on the index/market. The combination of steady economic growth, low inflation and accommodating monetary policy all contributed to stock markets around the world rising substantially in 2017. Stock market valuation is high, but can remain so if corporate earnings and dividends continue to rise with modest inflation. Ed Hyman, the well-respected wall street economist, notes that he does not see a recession developing in the next year or two and that corporate earnings should continue to grow 8-10% annually. Ed Hyman also reminds us that markets decline when earnings and dividends decline not when they are rising. While I highly respect Ed Hyman’s views there is a limit to what an economist can forecast. Most studies show that economists and the stock market are good predictors of the economy, but only for the ensuing six months.
2018 Outlook: We expect another positive year for the stock market, but returns may be more subdued and in line or slightly less than earnings growth. I believe a 6-9% rise in the S&P 500 Index is reasonable; based on current conditions. The S&P 500 Index price-to-earnings (P/E) ratio is 18.2x versus 15.0-16.0x historical average. History shows that 18.0x P/E ratios can be maintained with economic and corporate earnings growth.
Tax reform was finally signed into law at the end of 2017. The central component of the tax reform legislation is the reduction of the corporate tax rate from 35% to 21%. This component of the legislation is structurally imperative, in my opinion, for the U.S. to be competitive with other major economies around the world. The average tax rate for the 35 OECD country members is 22%. This new rate should encourage companies to invest capital here in the U.S. During the past several years many global US companies moved from the U.S. to lower tax jurisdictions. The new 21% U.S. corporate rate removes this incentive.
URGENT: review, change or affirm your investment strategy when markets are rising, not when they are declining. We are conducting annual client reviews and confirming that our clients’ investment portfolios have the appropriate level of risk and growth prospects for their situation. As we all know, this “feel good” market environment is most welcome, but markets do go down when one least expects it.
PLAN FOR LONG TERM GROWTH
PREPARE FOR PERIODIC STOCK MARKET DECLINES!
Rich Lawrence, CFA Managing Director