Market Commentary - January 2018

While bitcoin and cryptocurrencies are dominating the headlines lately, the S&P 500 is doing things it has never done in its history. In my 15 years in the industry I can't recall a run like we have had where every day is a repeat of the prior with new daily record highs in conjunction with record low volatility. Baring an enormous sell off the last week of December (I'm writing this On December 20th), the S&P 500 is going to set and break many records. Here are just some...

  • The S&P 500 is on pace to finish 2017 without a single down month. You may be asking when was the last time that happened? NEVER. Even further, one has to go back to October of 2016 to find the last negative monthly return.
  • The worst peak-to-trough drawdown in 2017 has been 2.8% while the average intra-year drawdown is ~16%. Even more stunning, the S&P 500 hasn't experienced one 2% move up or down close in all of 2017!

The Federal Reserve increased interest by .25% in December and projected three hikes in 2018 and the markets rallied even harder.  In years past, a mere mention of the words "rate hike" lead to panic and heightened volatility but today it's interpreted positively as it equates to a healthy and growing global economy. The markets seem to find the "good" in every piece of news. 

Geopolitical tensions continue to rise but even this risk is being brushed off.  It's interesting to watch how quickly sentiment changes as going into 2017 there was a cautious tone and analysts were anticipating extreme volatility. Even the most bullish analysts were calling for the S&P 500 to end 2017 in the 2,300 to 2,450 range. This goes to further solidify our opinion that trying to time markets should be avoided.

So what does all this mean for 2018? Well, in short, nothing. While these records are impressive, they are in the past and don't mean much going forward. While the global economy is growing and "major" tax reform is here, the question is how much of this have markets already factored in? It goes without saying that steady gains with low volatility are optimal for any investor, but not realistic long term. While the last fourteen months have defied the odds, I would not expect this going forward. If history is any guide, stock market volatility tends to accelerate after a one to two year dormant period and quite often market corrections start when it's least expected and when the economy seems to be humming along. 

Have a safe and happy New Year!