U.S. Stocks: Land May be In Sight Soon

Like a cruise ship steadily approaching its destination, U.S. Stocks performed very well in Q4 with the Russell 3000 up almost 7%. This topped a year that saw an unusual phenomena in that every month's returns were positive in the S&P 500.

While all major stock classes were up (large and small, growth and value), large growth companies continued apace with returns of over 8% for Q4. Russell’s large growth index was up over 30% for the year, reflecting the strong performance of large tech companies.

Technology stocks led performance of the U.S. markets in 2017, specifically the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google). Their performance was no less than fantastic, with the high being Amazon’s. A $10,000 investment in Amazon on January 1, 2017 would have appreciated by 56% to $15,600 by year-end. Even the lowest of the group, Google’s parent Alphabet, appreciated by an amazing 32% for the year. The S&P 500 index is now dominated by the tech sector, comprising over 24%. There are 10 industry sectors in the index and the all-time tech sector high was in 1999/2000 when it comprised 33% of the S&P 500.

Looking ahead, further stimulus for the stock markets may come from the tax bill that Washington passed at the end of the year. How much longer this cruise will last isn’t clear, but there are some signs that the end of the trip may be in sight. Many pundits are expecting continued strong growth for 2018 with a very low probability of recession until sometime in 2019. At some point, the U.S. stock market will anticipate a recessionary slow down. When it does, U.S. stocks’ relatively high-priced shares, especially the tech companies, could magnify a negative reaction.

Issues that may eventually come up to challenge this otherwise optimistic market are:

  • A slowing economy due to the Federal Reserve’s increasing interest rates.
  • A resurgence of inflation as unemployment continues to decline.
  • A return to “normal” market volatility where stocks once again react to negative news.

Finally, we must note that the Growth style (driven by technology stocks) won the return race in 2017. As mentioned above, it has been a strong run. Note that the last time tech had such a strong run (in 1999/2000), it was immediately followed by one of Value’s strongest periods. We don’t know that something similar will happen again, but we do know that the Value style has a high probability of rebounding based on the market’s performance over the last 90 years.



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