2017 was the year that:
President Trump didn’t torpedo the US economy, trade, bull market or democracy.
Euroskeptic populists didn’t take over Europe.
Brexit talks and high inflation didn’t tank the UK economy.
The British pound didn’t keep plunging.
High valuations didn’t bring stocks down.
The ECB tapered quantitative easing (QE) … and nothing happened.
The BoJ stealth-tapered QE … and nothing happened.
The Fed started shrinking its balance sheet … and nothing happened.
The Fed hiked rates three times … and nothing happened.
Big(ish) banks failed in Spain and Italy … and nothing happened.
Long-term interest rates didn’t soar.
North Korea didn’t nuke anyone.
All of these are things folks thought would roil stocks at some point this year. But none did. Either the thing everyone feared didn’t happen, or it did—and markets didn’t care. North Korea fired missiles over Japan, tested intercontinental weapons and detonated an H-bomb underground, but nuclear war didn’t break out, and South Korean stocks were among the world’s best performing. The ECB and BoJ’s small QE tapers didn’t kill off economic growth. UK economic growth slowed early in the year, before inflation really got cooking, and accelerated in the autumn as the annual inflation rate hurtled toward 3%. Eurozone Financials outperformed the MSCI World Index despite the failures of Monte Paschi di Siena in Italy and Banco Popular in Spain.[i]
Markets are efficient. They price in all widely known information long before most humans are able to think through everything and develop a rational view of the future. When stocks rise despite widely held fears, it doesn’t mean markets are wrong. Rather, we think it is a strong indication the market has weighed all possible outcomes and decided the likeliest result is things going better than most fear. This is why stocks have a long, long history of rising through conflict, natural disasters, terrorist strikes and other frightening or dreary developments.
Keep this in mind for 2018. Most outlets are already trotting out the obligatory list of things that could cause a big downturn this year. Among the highlights: Fed tightening, rising inflation, bitcoin crashing, US midterm elections, North Korea (again), high valuations (again), protectionism (again) and a strong dollar whacking Emerging Markets. None of these fears are new. We have already seen stocks overcome them—some more than once during this bull market. They don’t appear any likelier to cause actual problems this time around. None have surprise power, scope or inherent negative impact.False fears are good for one thing: They are bullish. Specifically, they show markets aren’t done climbing up the proverbial “wall of worry” that looms in every bull. As long as worries remain, it shows some skepticism lingers in the marketplace, preventing investors from becoming euphoric. Usually, at a peak, folks are out of things to worry about—everything is beautiful and nothing can end the party. That mindset isn’t here yet, which is one reason we think this bull market has room to run.
[i]Source: FactSet, as of 2/1/2018. MSCI World Index and MSCI EMU Financials Index returns with net dividends, 31/12/2016 – 31/12/2017.
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