2017 began with a wide chasm between 2 different schools of thought. The one side believed the market was doomed and would likely crater while the other saw nothing but clear skies and opportunity. As the year went on, the clamoring for a major pull back in the stock market grew louder and louder. However, the camp that saw opportunity proved to be correct. The U.S. stock market marched forward approximately 19% while the international markets were up in the 25-30% range depending on the region.
The individual companies that pushed the U.S. market higher were mainly technology driven. In particular, the company Nvidia, which makes processors for computers, increased over 115%. Thus, the technology space and the international markets were the major winners of 2017. Yet, I do not believe that is going to continue to be the case.
Looking Ahead
Once again I believe there are 3 areas of focus for 2018: The Small, The Foreign and The Dividend Payer.
The Small. I believe the smaller companies will look to outperform larger companies in 2018 (unlike 2017). One of the big reasons that I believe this will be the case is due to the recent tax changes. The larger the company the less impact the tax changes are likely to have on them. For instance, it has been widely publicized that General Electric (GE) has historically had an effective federal income tax rate of around 2.3%. The main reason is that GE has a plethora of accountants that scour the tax code in an effort to find every tax savings and/or loophole to lower their rate. Smaller companies simply do not have the resources to employ that many accountants to keep their tax rate down. Thus, I believe that they will see a direct benefit of the lower tax rates.
The Foreign. As I mentioned in Issue #7, “Don’t Build That Wall,” the time of seeing outsized performance by domestic stocks compared to international stocks has passed. The international markets are still playing catchup in the wake of the “Great Recession” to their domestic counterparts. Additionally, the weakening dollar versus foreign currencies will likely continue, which actually tends to increase the performance of your international investments.
The Dividend Payer. For the reasons outlined in, “The Stars Align,” coupled with the fact that dividend payers have not grown at the pace of the non-dividend payers, I believe they will perform well in 2018. In particular, there are 3 sectors of the dividend payers that I expect to perform well: Financial, Energy and Infrastructure. The financial sector has recently seen a reduction in regulations, which I believe will lead to increased profitability. The energy sector has not experienced much growth over the past few years in spite of their continued strong balance sheets. Lastly, I believe there will be a bipartisan deal on building out our infrastructure, which will greatly benefit the construction field.
The U.S. economy looks strong and poised for continued growth in 2018. In fact, we may see our economy grow at 4% this year, which is something that has not happened this century. I am cautiously optimistic that we will continue to be rewarded for investing in stocks. Yet, I reiterate the necessity that we prudently diversify our hard earned money such that we can withstand the unexpected storm.
The opinions voiced in this material are for general information only and are 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.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
