December 2017 Market Watch

Posted 05 Dec 2017 by Rick Irwin, CFP, CLU

We can look back on 2017 as being a fairly successful year, investment wise. Despite uncertainty about US political policy and sabre rattling with North Korea, most financial markets posted healthy gains for the year. The longevity of this market cycle, where the US stock market has enjoyed an almost uninterrupted rise since the lows of the Great Recession of 2008—2009, has some worried we are due for a correction. While there are signs of investor complacency and pockets of unbridled euphoria (think Marijuana stocks and Bitcoin) that echo the spectacular, and ill-fated, market surge of 1990, overall stocks are only slightly overvalued relative to historical averages. While the market trend, from the headline news numbers, seems to be broadly up and volatility relatively contained, there is actually a high level of inter-stock volatility. This means that there is a real divergence between winners and losers, as company fundamentals are mattering more than they did when the market was fueled by Central Bank financial meddling several years ago. This is specifically driven by the “disruptor” stocks, so called “new economy” companies that are crossing industry lines and taking market share readily from more conventional industries, like Amazon from traditional retailers.

We can never know for sure when the markets will experience their next leg down. We only know that it will happen again and, given the length of this up cycle, we are likely closer to the next downturn than the last one. That is why it is important to strike a balance between caution and seeking opportunities, and to be invested for a variety of outcomes. It’s also important to remember that you can’t time the market. Anyone who headed for the sidelines the last year or two has missed a significant amount of gains.

Reasons to be opportunistic are the continued, unprecedented, expansion of the middle (or consumption) class in the Emerging Markets and the rapid pace of global innovation. In some cases, disruptive business models and technologies, such as artificial intelligence, cloud computing, online retail and genomics that are transforming our world are also offering potentially very rewarding investment opportunities while at the same time causing pain for other companies that have difficulty adapting.
As always, and especially in times of great change like now, active management is key and that’s why I spend considerable time identifying fund managers that truly add value through independent research and stock selection. Make sure you have the correct investment mix for your risk budget and also one that will help you reach your financial goals. Maintain caution by adhering to proper principles of diversification, including taking positions in defensive strategies like bonds and alternative assets, but, if your risk appetite allows it, make sure you also tap into some of the more opportunistic themes that are present today.

We can’t know when the next market dip will take place, but I take great strength in knowing that there are powerful decades-long themes like the rise of the consumer in the developing world and the reshaping of our world through innovation that could fuel returns long term despite and short term corrections along the way.