- Global stocks rallied in 2017. Technology stocks are the top performing sector, as of late December. Energy is the worst performing sector.
- Risks remain, including the potential for rising rates, lofty valuations, and geopolitical uncertainty.
- Investing ideas for 2018 include banks, 3-D sensing technology, and power providers.
With just a handful of trading days left in 2017, global markets are on pace for yet another good year. Some of the dominant themes that drove the market include a synchronized global economic expansion, strong earnings growth, ongoing low inflation, central bank policy, and tax and regulatory reform.
In the US, 9 out of 11 stock market sectors are positioned to finish in positive territory—8 of which have gained double digits, as of December 20 (see Sector performance table).
Technology stocks have raced past the pack year to date, gaining 40%, nearly doubling second place health care's 22% gain. Consumer discretionary (+21%) was the only other sector that is beating the S&P 500 (+20%) at this point. Technology, health care, and consumer discretionary stocks have also been among the best performers over the longer term, looking at 5- and 10-year returns. Energy (-8%) and telecom (-6%) are the lone sectors in the red thus far this year.
Of course, there was dispersion within each sector. For example, one of the top performing industries was homebuilding companies (+72%), an industry in the consumer discretionary sector. Department store companies, an industry that is also in the consumer discretionary sector, lost 17% (see Industry price returns table).
The top performing industries, as of mid-December, are security and alarm services companies, homebuilders, and casinos & gaming. The worst performing industries are oil/gas drilling companies, heavy electrical equipment, and housewares & specialties.
And, as good a year as US stocks had, international markets are doing better. Through mid-December, developed international markets have gained more than 21% (as measured by the MSCI World Index ex US) and emerging markets (as measured by the MSCI Emerging Markets Index) have increased 25%—compared with a 20% return for the S&P 500.1
A calm ride up
2017 is on track to be the 3rd best year for US (and international stocks) over the past decade, trailing the S&P 500's 32% rally in 2013 and 26% gain in 2009.1 While those years were marked by a number of ups and downs, this year's rally was historically calm.
In fact, the CBOE Volatility Index (VIX) traded at its lowest level in decades for much of the year.1 Known as the fear gauge, the VIX reflects the market's short-term outlook for stock price volatility. Moreover, the S&P 500 rose or fell by more than 1% in a single day only 9 times this year. That's the third lowest rate since 1952, and is well below the annual average (47 days) and median (39).1
Finally, if the S&P 500 finishes with a positive gain during December, it will complete the first full calendar year since at least 1926 without a single down month on a total return basis—which includes dividends. Investors would be best served by being prepared for an end to these streaks.
Assessing the 2018 landscape
While past performance is no guarantee of future results, evaluating what drove the market in 2017 may help you manage your investments for next year.
The bull market will look to turn 9 years old in March, one of the longest such runs in history. Will 2018 be another positive year for stocks? Some reasons to think a bear market may not be in the market's near future include low inflation and a relative lack of leverage (i.e., debt that is used to buy assets) that might be expected to exacerbate a downturn.
However, there are risks to the rally:
- A potential rise in inflation—While it is currently low, an increase in inflation could cause the Federal Reserve to raise rates more rapidly than is expected. That could curb economic growth.
- Lofty US valuations—The S&P 500 is trading at expensive levels, as measured by the price-to-earnings ratio, relative to historical values.
- Geopolitical tensions—Saber-rattling around the globe was a persistent issue in 2017, and escalating tensions could have the potency to unnerve investors.
With these factors in mind, there are additional reasons to be cautiously optimistic about stocks, including a number of investable ideas that may continue to underpin the strong earnings growth that helped propel the market to record all-time highs in 2017. According to our 2018 sector outlook, some of these include banks, tech-enabling health care, 3-D sensing technology, industrial robots, and power providers.
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