2017 began with optimism from investors, consumers and businesses. The market’s great year began with a great first quarter followed steadily by similar gains in Q2 – Q4. Washington policy took a turn for the better despite unrest amongst the liberal socialists in our country. Trump’s first year was difficult for him and the nation as the country failed to unite; however, progress was made as Trump proved himself worthy of the job and did get one of his initiatives done! The tax cut was a great victory for business and had some modest benefits for most Americans as well. The obstruction to Trump’s plans was unfortunate. It continues but shows signs of waning as liberal democrats are losing face, and possibly their will to continue, as meritless attacks failed to distract the White House agenda, but did wear on the American public’s tolerance for dishonesty from their leaders and the media.
Growth and consumption?
The tax cut brightens the picture for our economy and markets. As a result, consumer spending, which was already running at a moderate pace, improved. Tech products were in high demand from all areas of consumption. Broad corporate spending on goods and services was soft and continues on this path, however there was a bright spot for Tech and industrial products with clear growth in demand visible. As a result demand for materials and energy improved. Government consumption moved toward more job creation and growth related consumption. The Healthcare mandate was abolished and other entitlements are now on the cutting board further advancing confidence. Exports are tilting up with trade deals on the front burner.
US GDP is still depressed but may be improving: Q1 – 2.2%, Q2 – 2.1%, Q3 – 3.3%, and Q4 – estimated to be 3.0%. Corporate earnings growth returned in 2017 but fell far short of high street expectations that prevailed for most of the year. (9.9% for S&P500 companies with narrow leadership) Troubled companies went private or bought back shares explaining the puzzle of modest GDP along with accelerating S&P 500 earnings. The outlook for 2018 from street analysts for earnings growth is bright. Expectations are for 25% growth with broadening leadership.
Assets richly valued?
The Dow cracked 25K in 2017 but PE’s remain well below all time highs. Broad leadership was notable in stock markets with all sectors of S&P 500 posting double digit gains for the year except telecom which lost 12% in 2017. The S&P 500 gained 21.8%, MACM’s Dynamic growth portfolio gained 28%, the MACM AAI portfolio gained 25%, MACM’s Diversified Equity Portfolio produced 29%, with the best returns coming from MACM’s Growth strategy which gained 33%.
Looking at equity sectors Tech gained 34% followed by Materials and Industrials at 24%, followed by financials and healthcare advancing 22%. 2017 was a great year for MACM clients with high absolute returns and alpha of 300-1100 basis points over returns for the S&P 500 Index.
Fixed income securities are still at historical high valuations, real estate, likewise, has historically low cap ratios, and commodity assets were soft as slow growth and low inflation prevailed in 2017. Stocks are now only moderately valued with renewed earnings growth offsetting the higher stock prices achieved in 2017.
Better business environment on horizon?
Cheap capital, rising consumer confidence, fewer and more friendly federal regulations, lower corporate taxes, strong asset values, and low inflation highlighted the good news businesses received in 2017. However, the good news was coupled with complaints about debt burdened consumers, unfriendly socialistic state regulators, expensive healthcare, and rising labor costs. Trump convinced many fortune 500 companies manufacturing abroad to return to America along with the repatriation of trillions of dollars from overseas operations that no longer have tax issues with American Government. The returning capital is already finding its way into the hands of American employees. All of this has worked to push consumer confidence to post recession highs. (Pg. 4, Figs 1 & 2).
The outlook is bright for business, consumers and investors! Businesses can see a light at the end of the dark tunnel that Obama regulations forced American businesses to traverse, and a lower tax burden justifying spending on growth initiatives. Employment is at all time highs and our trade position in the world is improving. There however remains significant work ahead for President Trump and our congress. Strong infrastructure, energy, and educational systems are the foundation for successful republics like America, but remain deficient as a result of the ineffective government we have had in America for a few decades. America spends more on education than any other country in the world but our education system ranks poorly (28th in some studies). Our infrastructure is crumbling and in decay. The turnaround in energy has already begun but much more needs to be addressed.
The markets will undoubtedly go higher as our economy progresses with careful guidance by the fed and the White House. America is on the road back to greatness!
We remain optimistic.