2017 was a great year for investors. Before looking ahead to 2018, let’s review how the major asset classes performed in 2017.
2017 Asset Class Returns
| Asset Class | Reference Ticker | 2017 Return |
| S&P 500 | VOO | 21.8% |
| Total Stock Market | VTI | 21.2% |
| U.S. Small Cap | VB | 16.3% |
| U.S. Value | VTV | 17.1% |
| Developed International | EFA | 25.1% |
| Emerging Markets | EEM | 37.3% |
| Total Bond Market | AGG | 3.6% |
| Treasuries | VGIT | 1.7% |
| Corporates | VCIT | 5.3% |
| REITs | VNQ | 4.9% |
| Oil | USO | 2.5% |
| Gold | GLD | 12.8% |
[Data source: Morningstar]
The S&P 500 finished 2017 ended up with a 21.8% return. One of the most remarkable aspects of the S&P 500’s run was that its rise occurred with almost no volatility. It was the perfect year for stock market investors.
It didn’t pay to tilt to small cap or value stocks in 2017, as the small-cap and value ETFs slightly underperformed the total stock market index.
International stocks outperformed domestic stocks in 2017 after several years of lagging returns. Emerging markets, generally more volatile than developed international stock markets, outperformed the other major equity asset classes.
Bonds had a decent return, in spite of the Federal Reserve raising interest rates multiple times in 2017. Corporate bonds outperformed Treasury bonds, as would be expected given the credit risk investors take with corporates.
But of course, the financial story of 2017 had to be cryptocurrency mania. Bitcoin, ethereum, and litecoin became household names as cryptocurrencies became the talk of water coolers and surgical lounges everywhere. Bitcoin rose more than 1000% in 2017 and continued to rise as numerous economists and financial bloggers called it a bubble.
Why The Stock Market Will Outperform in 2018
So how will the stock market do in 2018? In this post, I will make the bull market case, and on Wednesday, I will make the bear market case.
1. We’ve had a 9-year bull market, why not make it 10?
People have been predicting the end of this bull market for years, and the stock market has continued to roar to new all-time highs. The stock market has proven doubters wrong for years; what will make 2018 any different?
2. We do not see irrational exuberance in the stock market
The stock market rise, especially over the past year, has been quite orderly. I have not seen any well-publicized pie-in-the-sky projections for the stock market. The same cannot be said for bitcoin.
Goldman Sachs, in their 2018 projections, believes there is reason for “rational exuberance” regarding the stock market, and is predicting an 11% return for 2018.
3. The tax bill is favorable to corporations
Donald Trump and Republicans delivered their tax cuts in December 2017. One of the key provisions of the tax bill is the reduction in the corporate tax rate from 35% to 21%.
Corporations know that this tax cut will improve their profits, and some have taken the proactive step of passing some of that extra money to their employees.
Higher corporate profits mean higher stock prices. If the tax cuts can deliver what Donald Trump promises (a big if), the stock market will soar to new highs in 2018.
4. The economy is strong with no signs of slowing
All signs point to a strong U.S. economy. U.S. GDP grew by 3.2% in the most recently reported quarter (Q3 2017). This is very strong and exactly what the Federal Reserve policymakers and economists want.
Unemployment is down to 4.1%, which most economists would consider “full employment.” The U.S. economy created nearly 2 million jobs in the first eleven months of 2017. I don’t see why the economy cannot continue to grow at a healthy clip in 2018.
In fact, some economic forecasters believe we could potentially be in a Goldilocks-type scenario: below-average inflation and above-average economic growth. That’s a recipe for above-average market returns.
Conclusion
There are many reasons why the stock market will outperform in 2018. But unfortunately, there are also many reasons why it could underperform as well. For the stock market pessimists out there, I presented the bear market case in a separate post.
What do you think? Do you think the stock market will outperform this year? Care to make a prediction in the comments?
[Charts courtesy of Stockcharts.com]
Great analysis. I hope you are right. Everything seems to be pointing to another positive year.
2450 s&p
I am expecting a slightly down stock market in 2017, to consolidate recent gains. Who knows, maybe even an overdue bear market buried in there, prompted by an unexpected non-financial surprise. Cheers!
Well I hope for an up market maybe 5-10%. Since I am a long term investor I am always optimistic. Pessimists do not invest in stocks (they short them). I also am aware as Vagabond alludes to that a bear is overdue.
Let it be! We would love a continued growth in the market…but I am always a little skittish. Still there is no crazy market (except for bitcoin) and maybe we will be okay.
I think the stock market will go up in 2018, but it will be a choppy road. Volatile years tend to follow non-volatile years (2017). There are no big problems with the U.S. economy, so the stock market will probably follow the economy higher.
Happy New Years!
Troy
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