Stretch Armstrong Economy
Anyone who grew up during the ‘70s will remember a gel-filled action toy named Stretch Armstrong. The concept of the doll was his most notable feature: he could be stretched from his original size of fifteen inches to about four feet tall. Sometimes, however, he would tear if stretched to extremes.
Last year, the S&P 500 advanced 21.8%, including dividends. Make no mistake: 2017 rewarded those who were invested in a well-diversified stock portfolio. Growth stocks outperformed value stocks by a very wide margin. This tells us that earnings growth was the driving factor in last year’s equity performance.
Some investors are questioning – after eight and a half years of economic expansion – if stock values are over-stretched, thus “due” for an extended correction.
In response, we would start by pointing out that our current expansion is still not the longest one in recent history. The longest was the ten year upward trend from 1991 to 2001. But more importantly, we would stress that bull markets don’t die of old age; they die from recessions or policy blunders.
With history as our guide, note that since 1950 the S&P 500 has risen at least 20% in more than two dozen calendar years (24 to be exact). In each year that followed, the S&P finished higher 19 of those years, with an average gain of 18.1 percent.
Based purely on this example, last year’s impressive growth has little predictive value, with one exception: stock have an inherent upward bias over the long term.
2017 saw the first year of synchronized global growth since 2011; the momentum is likely to carry over into 2018. While a recession cannot be ruled out entirely, leading economic indicators still suggest the odds are low for that event in 2018.
That said, unexpected headlines – caused by policy blunders – create short-term emotional responses in the market. This serves as a reminder that intra-year pullbacks can – and do – occur, but that portfolios constructed on the strong footing of diversification provide ballast for equity market corrections.
As for fixed income, we expect the Federal Reserve to raise interest rates three times during 2018. At the same time, they are also selling $10 billion of assets per month in their plan to reduce the Fed’s four trillion dollar balance sheet. As monetary policy drives short-term rates up and as the reduction plan increases supply (impacting longer-term rates), we expect the yield curve to flatten throughout the year. We remain neutral on bonds, keeping maturities in the short- to intermediate-ranges.
As 2018 gets underway, we wish you and your families a happy and prosperous new year. It is our honor and privilege to assist you in any way we possibly can.
Texas Bank and Trust does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Investment products are NOT a deposit or obligation of Texas Bank and Trust, are NOT guaranteed by Texas Bank and Trust, are NOT insured by FDIC, are NOT insured by any federal government agency, and MAY go down in value.