A Year Unlike Any Other

On the basis of an improving global economy and the prospect of corporate tax cuts and in spite of headline risks from North Korea and the Trump-Russia investigation, stocks soared to new highs in 2017. The Dow Jones Industrial Average gained 25% for the year, its best performance since 2013. More remarkable than the gains themselves was the way they got there, with historically low volatility and a seemingly never-ending march upwards. Let’s consider some of the records set by markets last year.

At 3,219 days, this became the second longest bull market in history. The S&P 500 has returned 295% in this period, making it also the second strongest bull market in history. In both cases it is only eclipsed by the boom years of 1987 to 2000 (4,494 days and cumulative gain of 582%). An optimist might look at the math and say the market is poised to double over the next 3 ½ years, but a reversion to the ordinary seems likelier than a continuation of the extraordinary. Back in the 90s the catalysts for the bull market were obvious: the dissolution of the Soviet Union and the spending of the “peace dividend,” and the transformational explosion of computing and the internet. What are the catalysts now? Tax cuts and deregulation? They may have helped the economy recover from recession in the early 2000s, but a new era of widespread prosperity didn’t follow – the Financial Crisis did. Luckily, we don’t yet see anything like the excesses that built up ahead of those days. Neither do we see significant growth in productivity and median incomes, factors that would suggest the economic future is considerably brighter now than a year ago.

Other records include –

  • With dividends, the S&P 500 has generated positive returns in 14 consecutive months, the longest streak of gains since at least 1928.

  • The Dow closed at record highs 71 times, beating the previous high of 69 times in 1995. That’s a record close every 3 ½ days. Last week saw two more record closes in four trading days.

  • Volatility died. From August to November the Dow went 72 straight trading days without a gain or loss of 1% or more. The second longest streak was 50 days, set in February. Two of the next seven longest streaks also occurred in 2017.

  • We may be witnessing the greatest bubble of all time. When the price of Bitcoin breached $20,000 in December, its 2000% gain for the year represented an even steeper rise than that experienced by internet stocks in 1998. Now, we can only definitively call a bubble after it has popped, and Bitcoin has yet to do that. Like the internet, Bitcoin and its foundational technology, Blockchain, offer the potential to revolutionize aspects of the global economy. But the popping of the internet bubble left a lot of desolation, while a few gems like Amazon and Google arose from the ashes. Where Bitcoin will fall along that range is anyone’s guess.

For financial markets, 2017 truly was a singular year and we probably won’t see another like it in any of our lifetimes. As the New Year dawns, let’s resolve not to forget that, and put in place plans that will allow us to continue to prosper when financial markets return to the ordinary.