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2017: Wow what a year it was

Well, another year has come and gone, and it is time for our annual "state of the markets" client letter. And boy, what a year it has been. As you may remember, it was just one year ago in our January letter that we mentioned that we were watching to see if the Dow Jones Industrial average could punch through the highly anticipated 20,000 level. Well, fast forward almost exactly a year, and in this past week, on January 16th, we closed above 26,000 for the first time ever, representing the best start to a new year in over fifty years. Don’t forget it was just two years ago that we had one of the worst starts to a new year ever.

So truly, 2017 was a year for the record books in many ways...for example, this was the first year in history in which the stock market recorded a positive total return each and every month of the calendar year. Another impressive statistic was that the market did not see as much as a 3% drawdown at any point throughout the calendar year. That is a particularly interesting given that since 1980, the average pullback experienced during any calendar year has been 14%. To put that into perspective, that would represent a selloff of almost 3,700 points based on a 26,000 Dow, and that would simply be a normal inter-year event. But none of those occurred. And although many clients are feeling as if this has been almost too much of a good thing, remember that continued gains have been the case after strong years for stocks more often than not. When the S&P 500 has risen at least 19% in a year, the market has been up 17 out of the following 25 years (68%), with an average rise of 8%.

To speak further to those concerns, the late investing guru John Templeton once famously stated that “bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” We mention this as most of us would agree that at this point and after a nearly ten year bull market run, we don’t see the signs of “bubble like” behavior (Bitcoin may be the exception) that we did prior to the market selloffs in 2000 and 2007. Where there may be a feeling of optimism amongst us, we would not say that it feels “euphoric.” In fact this bull market has been labeled the “most hated bull market in history,” based on the lack of conviction in a large part of the investing public. To that point, there was a piece published just last week in the Wall Street Journal showing that individual investors have actually been selling stocks for years, hence not fully participating in this tremendous market run. Beyond the stock market it was also a respectable year for bond investors, as virtually all types of bonds experienced positive returns for the year, as did most commodities and international markets.

So what does 2018 hold for investors? At this time it appears that many of the positive trends that we have experienced in 2017 will continue into 2018. Unemployment is sitting at a 17 year low and consumer confidence at roughly a 17 year high, interest rates remain low by historical standards even as the Federal Reserve Bank has established a path of gradually raising short term rates. Inflation remains very much in check and corporate earnings have been quite strong. In addition, the recently passed tax bill should provide the opportunity for many companies to post higher earnings and profits, as their respective tax liabilities will be going down. Lastly, the expected repatriation of capital from overseas should provide corporations with excess cash for capital investment, dividends, stock buybacks, or acquisitions. Provided that we get the repatriation that is expected, we would anticipate that any of these uses will be further positive for stock valuations. Probably one of the most important and relevant occurrences that is happening right now, and for the first time in a very long time, we are seeing positive growth from all corners of the globe. In December the outgoing Federal Reserve Chair, Janet Yellen, stated that “there’s less to lose sleep about now than there’s been in quite some time.”

It is not to say that there are not things to pay attention to in 2018, most obviously geopolitical risk, and particularly North Korea. While most analysts only attribute a small level of risk regarding a possible conflict with North Korea, it cannot be dismissed entirely. Other things to watch in 2018 would be signs that inflation is picking up, as well as how interest rates react as the Fed unwinds its balance sheet. So remember that there is always something that can cause financial markets to react poorly, and that no matter how good the domestic economy and global market conditions may be, it is important to have an investment plan that is aligned with your personal risk tolerance, portfolio goals and investment time horizon.

Closer to home, our team continued to thrive and grow. Our youngest team member, Andrew Hays (the grandson of our founder Bob Hays), has just completed his first year on board with us, and has enjoyed getting to know many of our clients and learning a great deal more about asset management and financial planning. Andrew is planning to continue to focus on risk management and technology tools, and to work with other departments within Raymond James to hone that skill set.

Greg, Janet and TJ continued to serve our clients, our firm and the community in a variety of capacities, including serving on Raymond James's advisory council. This is an honor for us, as this group consists of just a handful of financial advisors from around Tampa Bay, each of which was personally selected by the upper management of our firm. We were not only flattered to be asked to join this distinct group, but we were the only team that was asked to have multiple partners join the council. Additionally, TJ was asked by our firm's president, Tash Elwyn, to lead the group charged with working with Raymond James' asset management department to help develop a more robust Socially Responsible/Values Based Investing platform, something which clients and institutions are increasingly expressing an interest in. As some of you may know, TJ built out a platform for use with our own clients, and the firm has taken notice of that and asked for his ongoing input and guidance in that arena.

Other notable developments in 2017 included Raymond James joining the ranks of the S&P 500, the first Tampa Bay area firm to achieve that distinction, and at the same time our practice's own growth has allowed us to continue to be ranked as one of the firm's top teams nationally, each and every month of 2017. As we have stated in the past, we sincerely appreciate the confidence and trust that you place with us each and every day. We don’t take that lightly or for granted. In closing, we would like to wish everyone a successful, healthy and prosperous 2018.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. Investors may not make direct investments into any index. Past performance does not guarantee future results.

This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions stated are those of the author and not necessarily those of Raymond James.

Sources: Standard & Poor’s, First Trust Portfolios LP, Jeff Saut - Raymond James