What happened in 2017, and what’s ahead for 2018?

The positive market performance of last year was delivered in spite of a tremendous amount of turmoil swirling around the world, and especially in the United States.  As we are all painfully aware, much of it created, maintained and amplified by politics.

US political actions and statements included international relations that offended allies and riled renegade regimes. Domestic interim elections that had him endorsing candidates with dubious credentials and tarnished reputations. And little legislative success until the Republican-sponsored tax reforms passed.

At home, it was a very Canadian year.  The stock market, measured by the TSX, performed more modestly than our American cousins.  Our leaders, acted with decorum and a long-term view, both domestically and internationally.  The North American Free Trade Agreement renegotiations continued with a reasoned and firm approach aimed at achieving a mutually beneficial solution.

As we move into 2018, there is growing concern that even more political drama may be created between the US, Russia and North Korea.

But back to the markets . . .

In 2017 the TSX delivered solid returns, but were significantly overshadowed by the three main U.S. equity indices; the Dow, the S&P 500 and the NASDAQ.  “The U.S. stock market posted a total return of 21.8%, its third-best year during this bull market, and the 18th year with a 20%-plus gain since 1967, putting it in the 30% of yearly returns of the past half-century”, according to Edward Jones.

Following a year of strong returns, like 2017, it is typical to think that the following year will give back the previous year’s gains, or stagnate.  However, the markets have priced-in an optimistic outlook already, and have done so over the past year with little volatility.  As always, maintaining a vigilant monitoring stance is crucial to achieve long-term success.

2017 was the type of year that could lull investors into false sense of security.  The level of volatility last year was nearly non-existent.  The S&P 500 that gained each and every month of 2017 also only had eight days with a change of 1% or more.  Out of 250 trading days, only 8 days saw significant gains or drops.

As each of the indices has grown in nominal amounts,

The Dow is now at 25,000 points.  The daily gains and losses will be larger numbers than we have been familiar with in the past.  Therefore, watching the percentage gains and losses over the entire year will become more important than the points; at least until we all become familiar with the size of these numbers.

The Canadian and American economies continue to grow nicely with favorable monetary policy from central banks, tax cuts from the U.S. for corporations and individuals, and job creation and unemployment levels at near record positives.

Unemployment rates in Canada and the U.S. are at their lowest levels in two decades and wage growth will be the natural next effect.  Increasing wages drives consumer spending, which contributes to Gross Domestic Product growth; all of which can lead to inflation.

2018 is expected to fall short of 2017’s economic performance. But the momentum of last year will not dissipate quickly or completely.

As a result of the expected slight slowing of the economies in North America. The amount and frequency of interest rate increases is expected to slow as well.  The Bank of Canada has trailed the U.S. in its rate-hike strategy and that trend will likely not change in 2018.

Two interest rate increases widely predict for the U.S. in 2018. As the Federal Reserve also reduces its bond holdings significantly during the year.  As the Fed reduces the size of its balance sheet by selling off these assets. It will be accomplished in a measured fashion to avoid any shocks to the bond markets.  This can be achieved under the current conditions of solid GDP growth, low inflation, and a strong jobs market.

2018 expected to be another positive year for equities. Based on the historical performance following 20%-plus years; but stay vigilant, as always.

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