Last year was a particularly strong year for global equity markets with broad growth and low inflation creating an almost perfect environment for equity investors. The markets continued that trend for most of January posting the best performance for the month on record. As the month came to a close, reports of increased inflation combined with a new Fed Chairman fueled fears of increased inflation and additional fed fund rate hikes for 2018. Markets sold off in quite a volatile week at the beginning of February but have since rebounded into positive territory for the year.
Although the price declines we saw early February were a bit unnerving, volatility is a normal part of long-term investing. Over the past few years the markets have had an abnormally smooth upward trend. According to Morningstar, more than half of the years since 1980 have experienced declines of 10% or more. When the market has experienced such a correction, the decline has averaged 14.2%. But here’s a surprising fact: In 58% of those years with a decline of 10% or more, the market actually ended up with gains for the year.
The U.S. economy is currently in its third-longest expansion, which began in June 2009. Previously, the longest economic expansion before this lasted 10 years exactly, or 120 months – between March 1991 and March 2001. Overall, we remain optimistic when looking at prospects for 2018, but we are cognizant of potential risks. Economic indicators are still quite strong and are far from pointing to a recession on the horizon.
A faster-moving economy has been good for investors’ portfolios; however it also presents a challenge to global central bankers and fixed income investors. The Fed has been tightening monetary policy for two years through rate hikes, and more recently by reducing its bond holdings. Stronger economic growth, a tight labor market and the prospect of tax cuts could mean U.S. inflation reaches or exceeds the Fed’s 2% target in 2018. That is likely to keep the Fed on track to tighten short-term interest rates at least two or three times over the coming year.
A synchronized global recovery is well underway and global growth remains robust. All of the 45 major economies tracked by the Organization for Economic Cooperation and Development grew in 2017 . We expect the global economic momentum to continue with low levels of inflation and a gradual normalization of monetary policy providing a positive backdrop for international equities to post attractive returns.
Heading into 2018, it is important to remember some time-tested principles for successful long-term investing:
• holding cash isn’t always the best investment choice.
• diversification is essential and helps dampen volatility.
• staying invested harnesses the power of compounding.
• volatility is the main catalyst behind a number of bad finance behaviors – most specifically, buying high and selling low; don’t let it derail you.
Your future is of the upmost importance to us here at CGC Financial. We look forward to meeting and hearing from you throughout 2018 and are honored to be part of your financial journey.