It's 2018, What's Your Next Shot?

On January 15th, 2018, the Australian Open kicked off.  This tournament is the first of the major four Grand Slam events of the year and it gives us tennis fans a perspective of what may occur over the rest of the year.  In fact, over the past ten years in men’s tennis, the winner of the Australian Open finished the year ranked in the top 3 nine out of ten times and finished No. 1 three of those times.  The only time the winner did not finish in the top 3 was in 2014 when Stan Wawrinka won the tournament and finished the year fourth, still a solid result.  In some ways, the stock market is like this tournament.  A solid start for the stock market can be a harbinger for a respectable finish.

In the first five trading days of 2018, the U.S. stock market (represented by the S&P 500) was up 2.8 percent.  Well, what does this mean for the rest of the year?  Historically, the S&P 500 has increased at least 2 percent over the first five trading days of a year 15 times.  When this has happened, the market finished the year positive 100 percent (all 15) of those times, with an average gain of 18.6 percent![1]

 

Like back-to-back aces, the 2.8% start to the year is even more impressive considering the 2017 market gain of 21.83% for the S&P 500 (including dividends).[2]  Many of the talking heads in the media have begun to draw comparisons between 2017 and 1999.   I have heard these assertions based on the technology sector’s gain of 38.83% in 2017 (including dividends)[3], and based on the market performance being attributable to a small number of companies.  Specifically, the top 5 contributors to the S&P 500 were responsible for 25% of the annual performance in 2017.  While this may seem large, this is roughly average for a year of positive returns.[4]  Also, in 1999 the total number of securities gaining was smaller than the total number of securities declining, indicating weak overall breadth in the market.  Many pundits measure this market breadth using the NYSE Advance Decline Line, which shows the total number of stocks advancing over the total declining.  This measure of market breadth deteriorated sharply in 1998, a stark contrast from the current environment where the NYSE Advance Decline Line continues to reach new highs.[5]  While today’s bull market may resemble the 1990s more than the Great Recession (2007-2009), the expansion is still distinct from the Technology Bubble.

Top 5 Companies.png
NYSE 90s and Now Combo.png

In 2017, only one American, Jack Sock, ended the year ranked in the top 10.  Stock markets demonstrated this, as well, as international equities (measured by the MSCI EAFE index) outperformed stocks in the U.S. (measured by the S&P 500) for the first time since 2012.  International valuations have been cheap for a while, but investors are finally seeing value in Europe as the economy recovers and the political noise wanes.  Early indicators, such as the Purchasing Manager’s Indices, point to Eurozone GDP growth of 3%.[6]  Furthermore, banks have shown consistent loan growth since 2015, consumer sentiment is on the upswing, and the central banks remain extremely accommodative.[7]  This could bode well over the near-term.  Net equity flows from mutual funds and exchange traded funds (ETFs) were positive for international stocks and negative for U.S. stocks in 2017.[8]  Perhaps, this development demonstrates investors’ confidence behind the nascent economic recovery occurring in the Eurozone.

Europe GDP PE Combo.png
Net Flows.png

In a lot of ways, the U.S. economy and stock market resembles the great Roger Federer.  He is a smart bet, with an impressive track record, and one the most consistent performers over the past 15 years.  However, he is old, and the door is open for a European to take his title.  He should still put up a good result this year, but the chances of him walking away with another victory is slim.  It should be a fun year to watch the stock market and the Australian Open.  I can’t wait to see the results!

 

To a great “Open”,

Grant Glenn, CFA, CFP®

 

The economic forecasts set forth in this material may not develop as predicted. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

 

 

 

 

[1] LPL Research, FactSet. 1/8/18

[2] S&P 500

[3] S&P GICS Sector Indices

[4] Bloomberg, JP Morgan. 12/31/2017

[5] S&P, Bloomberg, NYSE. 01/2018

[6] Eurostat. November 2017

[7] ECB, Haver Analytics, European Commission. November 2017

[8] Thompson Reuters Lipper. December 2017

Grant Glenn, CFA, CFP®