2017 Year End Market Recap
2017 was a great year for the markets and it was the first time ever that the Dow Jones Industrial Average (DJIA) has gained 5000 points in a year with 70 record high closes! There is no doubt a very high level of consumer and investor confidence as this bull market storms ahead. Large upward moves by US Equities have been enhanced by a lighter regulatory touch from Washington DC as well as a massive tax cut for corporations and individuals. 2017 was a good year in the markets and for the US economy as a whole. Optimism in the American economy breeds investor confidence and consumer spending, which, in turn, drives all the creation and manufacturing and shipping of products needed to fill those needs, which, in turn, gives us economic growth. For the first time in more than a decade, a majority of Americans see our economy as “good or excellent.” Gross Domestic Product or GDP which is a measure of the nation’s economic health will cross 4% this year for the first time since 2000! Analysts at Goldman Sachs are also predicting 2018 will see another year of 4% + GDP growth. America now enjoys an unemployment rate of just 4.1 percent, the lowest since 2000 and so far in 2017, a full 171,000 manufacturing jobs have been created. Moreover, the manufacturing unemployment rate is just 2.6 percent. While markets are cyclical and there certainly will be another correction, for now the trend is our friend and it is moving in the right direction.
Seasonally Strong Period
For followers of my market commentaries, I have written about the seasonally strong period of the market in the past. Historically, the start of November marks the start of the seasonally strong period for the market, the 6 month stretch of time between November and May. Historically, the market has performed better, on average, than the six months between May through October. Market seasonality is a phenomenon that has played out over the years in the market. While the market did perform very well this year during the seasonally weak months, the historical bias is still strong. That said, we enter this “seasonally strong” period of the market this year with positive signs from our indicators including seeing the U.S. and International Equities hold on to the top two spots in our asset class rankings, and the trends of the major market indices remain positive.
US Equities Remain #1Asset Class
As we just mentioned, US Equities continues to hold on to the top spot (as of 1/8/18) in terms of the relative strength ranking, with International Equities not too far behind. We have seen a significant increase in buy signals from International Equities in 2017 and is an area of opportunity as we move into 2018. Within the U.S. Equity markets, the Technology sector continues to not only lead, but has been the strongest sector. Financial, industrials and consumer cyclicals round out the top 4 sectors and have been large drivers of growth this year.
While Equities are still the leading asset class today, we are always looking for what will drive return tomorrow. It can be said that today’s winners are tomorrow’s losers and vice versa. The DALI chart above is the roadmap we use for portfolio selections and we work to monitor and stay on top of these changes. Like the weather and selections in the produce aisle, there is a season for everything. That being said, commodities have started to show signs of life. In 2017 we saw commodities move from 5 th to 4th place in the asset class ranking and recently Goldman Sachs came out predicting “bumper returns” for commodities in 2018. With soaring economic optimism and GDP growth at levels we haven’t seen in 17 years, we are seeing increased strength in all sorts of raw materials. Commodity prices throughout history have been reliably cyclical, they rise and fall significantly over timeframes of a few to several years. That's because when prices go down, producers go out of business. Eventually supply contracts to the point where there's a shortage, and then prices rise. New producers eventually start up, and finally there's an oversupply. Then prices fall, and the cycle starts over. The chart below is commodities prices plotted against stocks. In other words, we looked at how expensive commodities are relative to stocks. Think back to the 2000’s when US stocks fared poorly and the commodity sector was on fire. Are we now at the inflection point where commodities are favorable to equities? I think we will know the answer to that shortly, but in the meantime we will to move into this space as conditions warrant.
On December 20th, the US Senate passed the GOP Tax Bill and sent it to the President’s desk to be signed into law. It is the biggest overhaul to American tax policy in nearly 30 years. Individual federal tax rates dropped for lower and middle incomes and standard deduction was doubled for both individuals as well as those filing jointly. The bill also lowers the corporate tax rate from 35% down to 21% which will put America on competitive terms thus ensuring US Corporation will invest more in new factories and hence new jobs. Additionally, this will allow Americas Corporations the opportunity to finally repatriate in excess of $2.5 Trillion (CNBC) held overseas back home which can further add to economic growth. There are many other provisions to the tax bill and while the jury is still out as to its overall The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. The article and any opinions expressed therein are those of Carlson Asset Management and do not necessarily represent the opinions or strategies of Dorsey, Wright & Associates, LLC effectiveness in growing our economy Wall Street has signaled via the market that it likes the deal so far. One key point to remember about this tax bill is that it does not take effect for anyone until January 1, 2018. This means when we all go to do our taxes in April the old rules will still apply. As more information becomes available we will be passing it along in the New Year.
While 2017 has been a great year for stocks the party next door at bitcoin has become so wild there is no ignoring it. Perhaps we should call it Bubble Coin as Bitcoin traders have no time to pop the champagne anymore, Bitcoin and all other crypto currencies have seen exponential growth this year and it seems like I get a call everyday by someone asking what I think about the phenomenon. I have told my clients to treat bitcoin like the casino and to not invest any more than they are willing to lose. Some highly intelligent people have speculated the coin will go to $0 while others have speculated it could surge to $1million. There are a lot of unknowns with crypto currencies and the risk is high. If you do decide to buy some, my only advice is Be Careful, gambling money only! What I do know, is that the blockchain technology behind Bitcoin is real and will have many real world applications besides just Bitcoin. Blockchain is being pursued by some of America’s largest corporations who are spending heavily on this technology. Since bitcoin transactions fall outside of the control of government supervision, world governments and monetary authorities are feeling threatened and some speculate that the US government may even come out with an alternative crypto currency of their own.
In 2012, Washington and Colorado became the first states to legalize recreational marijuana use and on January 1, 2018, recreational marijuana will be legal in the state of California. The move will unleash a $50 billion industry. (Casey Research). California is the world’s sixth-largest economy. At $2.46 trillion, its economic output is 8 times bigger than Colorado’s. The city of Los Angeles sold more medical marijuana last year than Colorado sold total marijuana. While marijuana is still illegal on the federal level, as more states and countries legalize medical and recreational marijuana and public opinion shifts, there will be major investing opportunities as the market grows. Canada is poised to legalize marijuana this year and there are already marijuana companies listed on the Toronto Stock Exchange as well as ETF’s with marijuana exposure. We will be keeping an eye on this trend and if you have an interest please give us a call.
Bruce Carlson, CFP®
President Carlson Asset Management
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. The article and any opinions expressed therein are those of Carlson Asset Management and do not necessarily represent the opinions or strategies of Dorsey, Wright & Associates, LLC