The year was one of the purest in Market performance seen in decades. What lies ahead now that 2017 in officially in the books?
A Look Back
2017 had many notable market run ups. In a rarity for a positive year, Large Caps out performed Small Caps. In addition, international equities performed well for the year. Much of the market movement this year rose from currency movements and tax reform.
In 2016, we saw the $ rise against the €. That movement helped fuel the competitiveness of European companies in 2017. This gave way to growth that has been lacking in Europe during the past 9 years.
Tax reform has been the topic of the year as markets were banking on it from an early point. The profits from corporate tax cuts are anticipated to assist small corporations the most. So, as tax reform ebbed in flowed its way through both houses, so did Small Cap stocks. This likely kept Small Caps from outperforming Large Caps throughout the year.
A Look Ahead
History and Currency will likely play a large role in 2018. The potential growth in sight will likely cause a rise to inflation that we have been waiting on for years.
Over the last 35 years, it has been very rare for a year to pass without a 5% correction on the S&P 500. So rare that it has happened only one other time, 1995. They also saw 11 out of 12 months sustain a positive return. 2017 went 12 for 12! Should history tell us anything, it would be that the 4 years following 1995 came with robust market performance.
As 2016 currency movement brought European equity strength in 2017, 2017 currency weakness for the US should bring continued strength for US large multi-national companies in 2018. US companies that draw their profitability from outside our borders, do well when the $ weakens, making their products more competitively priced abroad.
Between increased profitability from tax reform, growing GDP, and a weak $, it is likely that inflation will re-emerge. Inflation is born out of disposable income, profitability should lead to just that. Look for strong performance out of Small Caps as well now that Tax Reform is not a concept, but a reality.
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