The bull market continued for another year, causing market indices to soar to new heights over and over again. Just about everything gained in 2017. Looking at large cap U.S. stocks, the widely-quoted S&P 500 index gained nearly 20% in calendar 2017. The technology-heavy Nasdaq Composite Index finished up 28%. International stocks also participating in the bull run with the developed foreign economies represented in the EAFE index posted a 21% gain. Emerging market stocks of less developed countries, as represented by the EAFE EM index, rose a remarkable 34% for the year.
This was a year when investors ignored the dire headlines, North Korean missile threats, investigations of the Presidency, hurricane devastation and a rapidly-growing national deficit to produce one of the smoothest investment rides in the past century. The VIX “fear” index has produced the lowest volatility since data has been collected starting in 1990. In October, the S&P 500 index broke its all-time record of consecutive days without a 3% draw down. The biggest single-day drop in 2017 was just under 2%.
How long can this continue? Who knows? The S&P 500 is now trading at around 18 times forward earnings, which is above the historical average of 16-which, loosely translated, means you aren’t getting a bargain when you buy stocks today. At the same time, we are experiencing low unemployment rates and solid profits for American companies. The U.S. economy is growing at a 3% rate. And the psychology of the markets doesn’t match what you traditionally see at market tops: people still seem to be suspicious about how long the market rally will last, unlike the normal buying frenzy that often presages the next sharp downturn. (To see what a market frenzy looks like, are you hearing more about bitcoin than you have in the past?)
And indeed, not all stocks have prospered despite the rise in indices. A company called Range Resources lost 54% in 2017 due to continuing low fuel prices, and firms you’ve heard of incurred significant drawdowns, including General Electric (-43%), Mattel (-43%), Advance Auto Parts (-42%) and the Apache oil and gas company (-34%).
Eventually, there will be a broader bear market which will see most stocks lose value. It will be impossible to spot by forecasters, but will seem inevitable with the benefit of hindsight. The important thing to remember is that few people have ever become extremely wealthy by timing the market and jumping out because they think they can predict the next downturn. Many have gotten significantly wealthier by holding on whenever the raft hits the rapids. We missed the rapids in 2017, but everybody knows they’re coming-someday, though perhaps not soon. Let’s make sure we have a tight grip anyway.