The Season of Giving is here, and the New Year is upon us. It’s time for reflection, and more importantly, time to prepare ourselves as we launch into another possible year of uncertainty.
Here are a few things to think about to help guide your investment plans for 2018.
1. The Historical Presidential Cycle:
If you’re anything of a “seasonality” buff, you might be following the “presidential cycle” which tracks historical consistencies in stock returns during a president’s 4-year tenure in office.
Here is what it looks like:
Next year marks the beginning of President Trump’s second year in office. So how has the market responded to his growth-leaning policies to date? Overwhelmingly positive: the markets skyrocketed even as he moved into the White House.
The S&P, up 19% this year, has far outperformed any returns seen during a president’s first year in office. The second year of a presidential term has historically seen a paring down of market gains, marking the weakest point in a 4-year term.
According to CSLA analysts, the low returns in a president’s second year is attributable to the tendency for presidents to get necessary but painful actions in place to pave the way for re-election or a party successor. Note how President Clinton hiked taxes immediately upon being elected into office.
But Trump is taking a direction that breaks from the typical strategy: as CLSA states, “all the good news is being front loaded in the first half of this presidential cycle.” Note the recent GOP Tax Reform victory.
Bear in mind that we are 9 years into the bull market—the second largest in US history. We may not see a repeat of 2017. But because retail investors just came aboard—markets fully loaded—that factor alone may fuel the markets to rise higher. As Warren Buffett—who did not vote for Trump—said: “America works, and I think it’ll work fine under Donald Trump.”
2. S&P 500 companies have posted record-level earning—but will this trend continue in 2018?
Growth in earnings per share, or EPS, is a traditional indicator for the health of a market. Positive business performance eventually translates into positive stock performance.
Take a look at the chart below:
2017 EPS is at $133.73, not only up 13% from last year, but a record high. In a report by FactSet analysts, they predict that at the end of 2018, EPS will exceed the current level by 7%, reaching $143.17. What does this mean? The stock market just might continue its bull run into record-setting levels.
3. The rise of small to mid-sized businesses.
So, what’s the forecast for small to mid-size businesses? There’s good indication that these businesses will also reach record-setting highs.
Over the last 44 years, the NFIB–National Federation of Independent Business—has been measuring the average monthly sentiment of small business owners. Last month, the readings (consolidated into an index) revealed a surging figure of 107.5!
This is a significant figure, as it marks the second-highest reading, only to be eclipsed by 108.0 when, in 1983, Reagan’s proposed tax cuts boosted optimism amongst business owners.
In short, small to mid-sized business owners are revving up to go into overdrive in 2018.
4. Gold prices on the move.
Gold is up for the year by 9%. At its current level, gold is experiencing its best year since 2011 when it logged a 10% gain.
This is not to say that gold doesn’t have some challenges ahead. Equity markets around the world are surging, and gold moves inverse to that trend. While at the same time, the Fed had stated it sees no more than three rate hikes in 2018, making yields potentially less competitive to gold.
Considering the weakening US dollar, there’s reason to believe that gold may hit the $1,300 level and move higher. According to CLSA analysts, the dollar has exhibited a historical seven-year cycle. For instance, the dollar gained 68% between 1978 and 1985. And from 1995 to 2000, the dollar gained 41%. To date, the dollar had risen 35%, but 2018 may see the end of that seven-year cycle. CLSA sees the dollar breaking below support at around the 91-92 level.
But there’s also the uncertainty of geopolitical risks (e.g. North Korea, Russia, etc.), increasing global debt, negative interest rates (Austria, Belgium, France, Germany, Spain, and others), and overvalued equity markets (Bloomberg sees the market cap in global equity markets nearing $100 trillion).
The case for owning gold and silver is stronger now than ever.
5. The seemingly unstoppable Bitcoin phenomenon.
There are plenty of people who became wealthy this year at rates unprecedented in both speed and magnitude.
At the beginning of 2017, Bitcoin was trading around $770. Now it broke above $18,000. This logs an astounding 2,200% return! Are there any forces out there to stop it?
Regulations? Probably not. Bitcoin was created to avoid such interventionist bureaucracies.
Might other “new” national cryptocurrencies bring down Bitcoin? Probably not. The lack of trust in government and central banks is what provided the fertile ground for Bitcoin’s creation and rise. A national cryptocurrency would antithetical to the entire crypto-phenomenon.
Might other competing cryptocurrencies, or “altcoins”? Perhaps. But remember that Bitcoin reflects a larger economic and social movement toward establishing free markets and competition against the fiscal monopoly of governments and banks. There are plenty more altcoins out there. So, if competition means a freer marketspace for currencies, let’s bring it on.
As we approach 2018, we wish you a Merry Christmas, Happy Hanukkah, and a successful New Year!