Fourth quarter 2017 added strong gains with the Wilshire 5000 Stock Index growing 5.88% while the Barclays Aggregate Bond Index added a steady 0.50%. This moved stock returns up 18.97% for 2017 and the aggregate bond market up 3.71%. *(Source Folio Institutional Custodial Reporting)
Accounts have moved forward nicely for 2017, exceeding our long term planning objectives at each risk level. When the year began we held an expectation of volatility returning to markets during the second half of 2017, with the highest probability of a temporary disruption to happen in October / November as the Federal Reserve began the process of unwinding the central bank balance sheet. It seems we missed the mark by about 2 months, as 2017 finished strong but a large pullback began on January 26th, 2018 that moved the stock market (as measured by the Wilshire 5000 index) down over -10% due to rising rates.
Since the lows on February 8th we have seen the markets slowly recover, with the stock market returning to positive levels, currently up 2.76% while the bond market remains down -2.03% for 2018. Aggressive, all stock, portfolios remain nicely positive for the year while more moderate, income focused and conservative portfolios hover around 0% thus far for 2018.
2017 experienced support from monetary, fiscal and regulatory policy. The combination of low rates, reduced taxes and reduced regulations served as a tailwind for the economy. Moving forward, we are unlikely to see this level of support in 2018. The question becomes….can the 2017 changes create the framework for sustainable economic expansion? So far in 2018 we have seen a reverse of the 2017 trend with tighter monetary policy and trade / tariff tensions. Will the tax benefits, corporate earnings, and the American work force overcome rising rates, increasing national debt and tighter trade? No one really knows the answer to this question. However, the data seems to indicate slightly higher rates will offset some, but not all, the benefits of lower taxes. Reduced taxation (corporate & personal), lower unemployment, and some wage growth will all add to increased consumption in 2018 that likely keep the economy stable and provide a solid floor for investment growth.
The earnings yield of the S&P 500 was 4.25% on October 1st, 2017. After recent Q4 guidance adjustment, the forward projected earnings yield for 2018 is 5.32%. This represents a large projected jump in earnings for Americas largest companies. Our biggest takeaway is the relative strength of companies. If rates remain somewhat accommodative and we do not see a major fall out from recent trade and tariff talks, then 2018 holds the potential for a continued upswing.
We remain cautiously optimistic for 2018, with an understanding that variables well beyond our control can play a large role in temporary results. Most importantly, we remain confident in the market over the long term (5,10,15+ years) and the ability for Stocks and Bonds to keep producing solid long-term results that can meet planning objectives. 2016 and 2017 has offered solid returns in accounts that exceed our planning objectives. We look forward to 2018, ready to take advantage of opportunity should it arise, but hopeful to see continued gains and/or income that meet or exceed planning goals.
Evergreen Wealth remains committed to providing holistic investment solutions and financial planning. We remain honored to continue stewarding your assets and retirement journey.
Evergreen Wealth Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.