2017 Financial Review
….Year end review of stocks, bonds, commodities, and more. Plus, the annual bankster of the year award, and (dis)honorable mention. Happy New Year…
Financial Review by Sinclair Noe for 12-29-2017
DOW – 118 = 24,719
SPX – 13 = 2673
NAS – 46 = 6903
RUT – 13 = 1535
10 Y – .03 = 2.40%
OIL + .26 = 60.10
GOLD + 7.60 = 1303.30
The U.S. stock market turned in a stellar performance for 2017. Stocks slipped on the final trading day of 2017, but not by nearly enough to cast a shadow on the incredible rally this year. For the first time ever, the S&P 500 finished every month of the calendar year with a gain. The Dow Industrial Average posted 71 record high closes, a new record for record highs. For the year, the Dow shot up by 25%, the S&P 500 surged by 19% and the tech-heavy Nasdaq index outshined them with all with a stunning 28% gain. The Russell 2000 index of smaller-company stocks gained 13%.
The rally was led by gains in the technology sector, up nearly 40 percent for the year. Of the 11 major S&P sectors, nine were in positive territory, with only energy and telecoms in the red. The best performing stock in the S&P 500 was Align Technology, the maker of the clear teeth-straightener Invisalign, with a 136 percent increase as of Dec. 28. With estimated revenue of $1.49 billion in 2017, the San Jose, California-based company’s sales have almost doubled in just three years as popularity of its smile-correcting products grew. It remains tiny within the S&P 500, where average annual sales are $22 billion.
MSCI’s world equity index finished December with gains, marking a 14th straight month advances to put it at an all-time high. The index gained 22 percent for the year. Emerging markets have led the charge with gains of 34 percent. Hong Kong surged 36 percent, South Korea climbed 22 percent, India rose 28 percent and Poland made 27 percent in local currency terms. The best performer was Argentina’s Merval index, up 77% for the year.
Mergers and acquisitions had another strong year in 2017, reaching their third highest annual level since the 2008 financial crisis. Setting 2017 apart was the willingness of potential acquirers to approach their targets unsolicited. In some instances, as with chipmaker Broadcom’s $103 billion cash-and-stock bid to take over peer Qualcomm, the target companies refused to engage in talks. Unsolicited takeover approaches helped push global M&A to $3.54 trillion in 2017, roughly in line with last year’s $3.59 trillion. The peak M&A year since 2008 was 2015, when M&A totaled $4.22 trillion.
Among this year’s biggest acquisitions were drugstore chain operator CVS Health Corp’s $69 billion agreement to buy health insurer Aetna; Walt Disney’s $52 billion deal to buy film and television businesses from Rupert Murdoch’s Twenty-First Century Fox Inc; and aerospace supplier United Technologies’ $30 billion agreement to buy avionics maker Rockwell Collins. Companies may decide to allocate more of their cash to M&A in 2018 following the implementation of the U.S. tax changes. U.S. companies with lots of cash trapped overseas can now more easily put capital to work in the M&A market, while Europeans may try to take advantage of favorable tax policies to do more deals in the United States.
The tax deal was probably the biggest financial story of the year, even though it only passed in the final weeks. Time will tell how it all shakes out, but look for 2018 to be the year of finding loopholes in the plan.
Oil prices rose above $60 a barrel on the final trading day of the year, touching their highest since mid-2015. West Texas Intermediate is 12 percent higher for the year. Earlier this year, oil prices slumped on concerns that rising crude production from Nigeria, Libya and elsewhere would undermine output cuts led by the Organization of the Petroleum Exporting Countries and Russia. Prices have rallied nearly 50 percent since the middle of the year on strong demand and disciplined compliance with the production limits. That trend is likely to continue into 2018 and worldwide oil inventories will likely continue their decline.
Gold extended its rally to a three-month high on Friday, leaping toward its biggest one-year rise in seven years as a wilting U.S. dollar, political tensions and receding concerns over the impact of U.S. interest rate hikes fed into its rally. This recent bout of weakness in the dollar certainly is fostering a commodities rally. Everything from coal to iron ore has reaped gains, with copper a stand-out performer in part due to expectations of rising demand for the mass production of electric vehicles. Spot gold gained 13% on the year. Gold’s chart signals look positive after it broke above its 100-day moving average this week at $1,295 an ounce. Among precious metals, palladium posted the strongest rise this year, climbing 57 percent as concerns grew over availability after years of deficit.
The dollar fell to its lowest in over three months against a basket of major currencies today, down 10 percent on the year, marking its steepest annual drop since 2003. The greenback may lag further against its peers in 2018 as investors expected other major central banks to reduce their stimulus while the Federal Reserve has signaled it would raise interest rates further. Outside of traditional currencies, bitcoin and other cryptocurrencies rebounded after two days of losses tied partly to more regulators toughening rules on digital currencies in a bid to curb excessive speculation. Bitcoin traded today at $14,564 on the Bitstamp exchange. It was off the record highs near $20,000 touched 12 days ago but still headed for a gain of roughly 1,400 percent in 2017.
The bond bears missed it again. The yield on the 10-year Treasury was almost unchanged after 12 months of trading; starting the year with a yield of 2.44% and finishing with a yield of 2.40%. The yield curve flattened substantially, and that may be cause for jitters. The yield on the 2-year U.S. treasury note recently surpassed the dividend yield on the S&P 500 for the first time in nearly a decade, which could sap some demand for stocks in a low interest rate environment. But the bond market has been remarkably calm, even as the Federal Reserve has hiked interest rates three times and started selling off its balance sheet.
The country has added jobs for 86 consecutive months, the longest streak on record. The unemployment rate has ticked down to 4.1%, the lowest level since 2000. Compare that to 10%, which it reached in October 2009, when the economy was in shambles. The economy added about 1.9 million jobs this year (depending on the December numbers), not as good as the 2.1 million in 2016, but still good. That should be enough for the Fed to continue raising rates, even if we don’t see an uptick in inflation.
The only thing more boring than bonds was volatility, the Vix or volatility index started the year at 14 and finished at 10. The movement for the year was slow and drifting lower. The VIX at 10 is historically low but simply reflects the idea that nobody is really betting the market will tumble in the foreseeable future.
Of course, not all stocks and not all sectors performed well. Most notably, retail faced a meltdown, at least the brick and mortar sector. Here are a few of the retail names that filed for bankruptcy this year: Payless, Radio Shack, Styles for Less, Toys R Us, Gander Mountain, Gordmans, Aerosoles, Vitamin World, Vanity, Perfumania, BCBG, Eastern Outfitters, Wet Seal, and the Limited – to name just a few. And some iconic names like Sears and JC Penney look wobbly for 2018. Distressed bond issuers in the U.S. retail and apparel markets are nearing recession levels, tripling in the past six years, according to a report released by Moody’s Investors Service. The report found 13.5% of Moody’s retail and apparel portfolio is distressed, compared to 16% during the Great Recession. Debt maturities are also headed toward record levels over the next five years.
The bankster of the year award goes to Wells Fargo, again. They won the dishonor last year by opening more than 2 million bogus accounts – a number that grew by 1.4 million as they dug a little deeper. They win the dishonor this year by signing up more than 800,000 of their auto loan customers for auto insurance they did not want or need. Some people lost their cars when they could not pay.
And while all that was bad, it did not affect nearly as many people as the Equifax hack. Equifax is the company that has self-appointed itself as guardian of all our financial data. They are lousy guardians. In September, the national credit bureau reported a major hack that exposed the names, Social Security numbers, birth dates and addresses of 145 million Americans, or more than half of the country’s adult population. In response, many people started monitoring or even freezing their credit. It has been three months since the massive Equifax breach was disclosed, and the initial fraud alerts Americans put on their credit reports for protection are starting to expire. The alerts only last for 90 days. You could put another fraud alert on your report and, come March, do it again, and so on. Or you could go straight to a credit freeze. Or you could just do not much of anything, and hope for the best. Thanks Equifax.
As for 2018, the equity markets are on track for another solid year – a forecast that is subject to rapid change. At some point during the year, Robert Mueller will conclude his investigation and make some sort of definitive pronouncement; I don’t know what he will announce but it will be important. We have midterm elections later in the year, and I’m not crazy enough to make a forecast on that.