“Animal spirits” were once again at large in global equity markets during the fourth quarter of 2017 as economic growth perked up in many parts of the globe and equity market returns followed in kind.
Rarely do we move directly from boom to bust; but when the shift comes, it can develop quite quickly, even though the transition isn’t usually obvious in real time. As I look at the data and talk to my contacts, I’m beginning to conclude that we’re approaching one of those transitional phases. I think we’ll look back at 2018 as an in-between year… from good times to something eventually not so good.
Sir Isaac Newton’s magnum opus, Mathematical Principals of Natural Philosophy, established the laws of motion and universal gravitation which underpinned how scientists thought about the physical universe for centuries. Newton did not cover the laws of financial gravitation, which appeared not to apply in 2017 as the stock market soared to another 22% return...
I expect the S&P 500 to lose approximately two-thirds of its value over the completion of this cycle. My impression is that future generations will look back on this moment and say "... and this is where they completely lost their minds." As I’ve regularly noted in recent months, our immediate outlook is essentially flat neutral for practical purposes, though we’re partial to a layer of tail-risk hedges.
We must next decide what, specifically, a newly formulated GDP should measure and how – and that’s a thornier question than you might think. Today we’ll wrestle with that question and with some of the implications of changing how we measure growth.
During the fourth quarter, the stock market, as measured by the S&P 500 Index (the S&P 500), rose another 6.64%, propelling its full year 2017 total return to 21.83%. This reflects the continued low inflationary economic expansion, rising corporate profits and a very clear pro-business agenda in Washington.
Imagine this: Rising interest rates and reduced foreign capital flows combine to push housing prices down in places like Vancouver. Leveraged players who own speculative homes start to liquidate their properties, pushing prices down further. Banks find themselves holding properties they neither need nor want. The dominoes begin to topple.
After a four-year downturn in the oil and gas master limited partnership (MLP) sector, marked by a roughly 47% decline in market value, we believe sentiment toward the sector may be turning. With dividend yields approaching 8% – along with increasing free cash flow and a robust U.S. production outlook...
Here we are, nearly three times the level at which I expect the S&P 500 to complete this cycle. Yet our immediate outlook remains neutral (though tail-risk hedges remain appropriate). It’s essential to distinguish between valuations, which have long-term implications, and market internals, which have implications for shorter segments of the market cycle.
Only two weeks in and 2018 is already breaking records – mostly in a good way. But that leaves 50 potentially less enjoyable weeks to go. So rather than focus on promising current events, I think I’d better dip back into my annual forecast bag and share a few more highlights with you.