By most investors, 2017 was a year filled with great highlights. The stock market performed well above its historical average, unemployment hit record lows, interest rates remained modest and volatility was practically non-existent.
Yet despite the barrage of new record highs that has many pundits predicting 2018 to be as great as 2017, it is important to remember that not everything related to the stock markets and the economy did well. In fact, there are quite a few areas that might – during other times – have investors a little bit worried.
Here are a few:
This Bull Must Be Tired
The current bull market is closing in on a 9-year run without a 10% correction.
Last year, the DJIA set 71 all-time highs, besting the previous record of 69 set in 1995. And market commentators are starting to use words like “The New Normal” again. Note to investors: the term “New Normal” was originally coined as we were heading into the 2008 financial crisis.
A recent University of Michigan sentiment survey showed more than 65% of respondents expect stock prices will be higher in one year.
This is higher than even the pre-crisis euphoria in 2007. Of course, everyone remembers the 17-month bear market that lasted from October 2007 to March 2009, during which time the S&P 500 lost about 50% of its value. Right?
The Falling U.S. Dollar
Last year, the U.S Dollar recorded an annual decline for the first time in five years.
The U.S. Dollar Index, which measures the value of the dollar against a weighted basket of currencies from six of our biggest foreign trade partners - the Euro, Yen, Pound Sterling, Canadian Dollar, Swedish Krona and Swiss Franc – fell nearly 10% in 2017. This is quite a drop, especially since in January 2017, the US dollar was at its highest level since 2002.
Sure, investors can benefit from opportunities presented by a falling U.S. dollar. But consumers can be pinched too: consider that a falling dollar makes oil imports more expensive, which pushes up the price of oil, which dictates that a dollar buys less gas for your car.
M&A activity in the United States dipped in 2017 both in terms of deal size and number of deals announced. The year started out great with 119 mergers announced in the first six months, but as the summer got hotter, M&A cooled off.
When the year was over, we witnessed $687 billion worth of announced M&A among 217 deals. This compares with $794 billion among 228 deals in 2016 – a 13.5% drop. And this is the second year in a row that both the number of deals and the total size of the deals declined.
The FAANG rally was something to behold last year, returning over 50% on average.
Facebook gained 55%; Apple rose about 48%; Amazon was up about 59%; Netflix gained 61% and Google (Alphabet) gained 38%.
The fact that the term FAANG is a household name worries the contrarians.
These are just a few items that investors should think about in order to ensure that they frame their 2018 market expectations well. Clearly most everyone would prefer to talk about what’s going right with the markets and the economy. But remember the words of philosopher George Santayana:
“Those who do not remember the past are condemned to repeat it.”