Looking Back at 2017 & Ahead to the New Year

As we kick off 2018, it’s always good to look back on the highlights of last year and contemplate what the New Year might bring. While the US economy finished 2017 on a strong note, it certainly didn’t start out that way. GDP was up only 1.2% (annual rate) in the 1Q but rebounded strongly with growth of 3.1% and 3.2% in the 2Q and 3Q. Most forecasters believe growth was around 3% again in the 4Q.

The Atlanta Fed just increased its 4Q GDPNow forecast from 2.8% to 3.2%, citing rising consumer spending and yesterday’s stronger than expected ISM Manufacturing Index number. With business investment and consumer spending rising briskly, and with the new tax cuts, most economists expect another year of solid GDP growth in the New Year.

The unemployment rate fell from 4.7% at the end of 2016 to 4.1% as of November, the lowest level in 17 years. The economy added two million jobs last year, bringing lots of Americans off the sidelines. Most forecasters expect the unemployment rate to fall well below 4% this year.

The major US stock markets had their best year since 2013 with the Dow up 28.1%, the S&P 500 up 21.8% and the NASDAQ up 29.0% in 2017.

The US equity markets set a new record for the number of record high closings in a single year in 2017. Since the 2016 presidential election, the Dow set a new record of 89 new high closings through yesterday. Most forecasters expect more new highs in 2018.

The Fed raised short-term interest rates three times last year with the Fed Funds rate now in the range of 1.25% to 1.50%. The Fed says it intends to raise the key rate three more times in 2018. While that is fully expected by the financial markets, continued rate hikes will act as a headwind on equity gains this year.

Despite the uptick in interest rates, the US housing market remains very strong. Sales of new and existing homes rose solidly last year. Home prices rose nationally about 6% last year, based on preliminary data for December, finally putting them above the pre-recession peak on average.

And this is interesting: According to the S&P Case-Shiller Home Price Index, only 5% of homeowners now remain “under-water” on their mortgages. Most of those are in hard-hit cities such as Las Vegas, Miami, Chicago, Scranton, Akron, etc.

The GOP tax reform bill that President Trump signed into law just before Christmas does reduce some tax breaks for homeownership this year and going forward.  As a result, that may slow the pace of rising home values. Still, most economists expect home prices to rise by about 3% this year on average.

All in all, 2018 shapes up to be another solid year for the US economy and for much of the rest of the world. Most forecasters see continued “synchronized global growth” in 2018.

Other than the “perma-bears,” I don’t read anyone who is predicting a recession this year – and that’s a scary thought from a “contrary-opinion” perspective. In case you’re not familiar with that term, contrary opinion theory holds that when too many investors get too bullish, or too bearish, it is often profitable to bet against them.

Economists tell us that in any given year, there is about a 20% chance of a recession occurring. The problem is, it’s nearly impossible to predict when they will occur. The causes of recessions are not limited to domestic matters like interest rates or consumer spending. Outside matters, such as a war with North Korea or a trade war or some other foreign surprise can trigger recessions as well.

I’m not predicting a recession this year. On the other hand, we can’t rule it out, especially with all the saber-rattling between President Trump and North Korea’s Kim Jong Un. That’s why it is good to have a portion of your portfolio in investments that can move to cash or hedge long positions should we encounter some negative surprises.

As always, call us at 800-348-3601 to find out more about these alternative strategies.

Happy New Year, Everyone!!

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