Key Points

  • A better-than-expected 2017 appears to be morphing into a solid start to 2018, but it is unlikely to be as smooth a ride. We believe the bull market still has room to run but it could shape up to be a bumpier ride as expectations and sentiment are elevated.

  • U.S. economic growth appears to be picking up, but with the Federal Reserve tightening policy and inflation likely to heat up, we appear to be in the latter stages of the cycle.

  • Global markets are also poised to have an unprecedented year of performance; which is unlikely to be repeated, but conditions around the world still look largely supportive of further gains.

What a Year!

The year is in its waning days and barring a bombshell in the last couple of weeks, 2017 will go down as one of the most remarkable on records. Few investors expected the S&P 500 to post gains of close to 20% with near-record low volatility while enduring geopolitical tensions, massive natural disasters, political infighting in Washington, and a tighter monetary policy. This year has demonstrated why it can be detrimental under-exposed investors to wait for a pullback. As of this writing, we are in the longest period in S&P 500 history without a 3%+ correction, with no move of that size since November 4, 2016. Another mark of the steadiness of the market in 2017 has been the attention the small pullback we’ve seen lately has gotten—with some media pundits asking whether this marks the beginning of the end. We remain in the no camp, and believe that any pullback or correction would be a healthy development in the context of an ongoing secular bull market.

A smooth ride in 2017

Source: FactSet, Standard & Poor's. As of Dec. 5, 2017. Past performance is no guarantee of future results.

Source: FactSet, Chicago Board Options Exchange. As of Dec. 5, 2017.

But while we think the bull market still has room to run and investors should remain at their long-term strategic equity allocations, it can be easy to get complacent after a year like this.