For most of 2017, the situation on the stock market exceeded investor expectations.
Many stock managers and analysts at the beginning of the year mainly expected a sideways trend, at which the level of key indices at the end of the year as a whole would remain unchanged.
However, the S&P 500 at the current pace will end the year with the largest increase since 2013, according to Dow Jones.
Some were surprised at the simultaneous effect of several trends supporting the market.
They did not expect the profits and revenues of companies to grow so quickly. They did not expect the economic growth of all 45 countries, the development of which is monitored by the Organization for Economic Cooperation and Development, a rather rare phenomenon.
They could not even imagine that the volatility would remain so low even in the face of geopolitical unrest in Washington and around the world.
“The market was unshakable,” said Joe Kinahan, TD Ameritrade’s chief market strategist. “He swayed a couple of times, but there wasn’t a crazy sales flow. Every recession brought major purchases.”
In anticipation of 2017, many analysts and investors predicted a moderate increase in the S&P 500. In January 2017, Goldman Sachs Group Inc. in an analytical review, he indicated that the index in the 1st quarter would increase to 2,400 points, and by the end of the year it would go down to 2,300 points. Credit Suisse also suggested in early January that the index would end the year at 2,300 points.
The basis of the 20% growth of the index was an increase in company profits, which, when calculated on the basis of earnings per share, may be the most significant since 2011.
At the end of the first quarter, analysts polled by FactSet suggested that S&P 500 companies would report a 9.1% profit increase. However, according to FactSet, quarterly earnings rose 14%.
At the same time, growth continued, albeit at a more modest pace: in the 2nd quarter, the profit of the S&P 500 companies increased by the same period of the previous year by 10%, and in the 3rd quarter – by 6.4%.
“Growth has peaked,” said Bob Doll, senior portfolio manager and chief stock market strategist at Nuveen Asset Management. However, according to him, investors do not have to rush to sell shares: even if growth slows down in the next couple of years, there is still room for improvement.
Due to the strong growth of this year, some analysts worry that in 2018 the rally may come to naught, especially if the volatility, which reached a historic low this year, intensifies, as many predict.
The ratio of share prices to profits for 12 months exceeds average values, and there were alarm signs on the government bond market regarding the prospects for the US economy, and in 2018 this could be a shock for the indices.
Doll admitted that his forecasts for the S&P 500 in 2017 turned out to be inaccurate. He explained the strong increase in the simultaneous growth of the economies of different countries. The United States has recovered faster than others from the financial crisis, but this year other countries have also tightened up.
As a result, the vast majority of world stock indices are at record highs or multi-year highs, starting with the Japanese Nikkei Stock Average and ending with the British FTSE 100. The MSCI All Country World Index is also close to a record level.
Analysts argue about how important it is to reduce the difference between short-term and long-term US Treasury yields, but this process, known on Wall Street as a flattening yield curve, was often an alarming sign.
Judging by the data of the Federal Reserve Bank of St. Louis, in five of the last six cases when the yield on 2-year bonds exceeded the yield on 10-year bonds, that is, there was a yield curve with a negative slope, the economy subsequently entered a recession phase.
True other no signs of recession, and investors believe there is reason to doubt these signals. According to some, the soft policy of the central banks of Europe and Japan influenced the yield curve, because of which investors turned to US government bonds in search of income, and the yield on long-term securities declined.
However, many investors and analysts believe that the leveling of the curve will continue in 2018, given that the Fed seems to be able to continue raising rates even if inflation remains below the 2% annual target.
As a result, due to these factors and a slowdown in economic growth, 2018 may be more difficult than the current year.
A positive point, which some analysts point out, will be a reduction in the corporate tax rate, which may lead to increased growth in profits and shares. Nevertheless, some analysts worry that the benefits of tax reform may already be taken into account in the price of shares of companies, which means that in 2018 the space for growth will be limited.
“We are used to things being very good,” said Brad Macmillan, Investment Director of Commonwealth Financial Network. In 2018, he does not expect any significant ups or strong falls.
“For a cardinal change in the market situation, it is not at all necessary that favorable trends turn into unfavorable, a pair of positive factors disappears,” he explained.