2017 Q4 Market Commentary
It was quite a year driven by earnings growth and the hope and realization of deregulation and tax-reform. We began the year at 2,238.83 on the S&P 500 following earnings of $106.26 for 2016. In 2017 those earnings rose to $124.94 – an increase of 17.6% which is stellar by any measure. As we approach 2018, estimates are set for another big gain of 16% to above $145 on the backs of the corporate tax cut and deregulation. This is the reason that we ended the year with an S&P 500 valuation of 2,673.61 as it posted a gain of 19.4%.
There was a pretty significant divergence in the market in 2017 – Growth vs. Value. Looking at the performance of the I-Shares Russel 1000 Growth Index, it posted a gain of nearly 30% for the year vs. only 13.5% for the I-Shares Russel 1000 Value Index. This nearly 17% difference is enormous when compared to historical returns. A continuation of this trend is possible given the earnings expectations above but a move to Value in a healthy market could mean big gains there.
As we look forward, despite the strong earnings backdrop, there are many reasons for concern as we enter the New Year. This rally is certainly long in the tooth. The S&P 500 index has risen every month except for one since the election last November. The Price to Earnings Ratio (P/E) has risen to about 18.4x looking forward which is higher than the historic average of about 16x. Short-term interest rates have been rising creating a flatter yield curve which has never been good for the stock market. It’s another important election year which creates some uncertainty. Finally, we still have some massive valuations and some major speculation in some specific areas which could pose a problem for the markets if the flame burns out there. Any correction however could be seen as a welcome sign to keep this thing going because this level of earnings growth is very significant.
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