Financial Industry Insights from Advisors Asset Management


A Perfect Year – Outlook for 2018

2017 was the first perfect year in which the S&P 500 had a positive return every month for the entire year. 2017 also coincides with the U.S. Output Gap swinging back to the long-term trend line which we haven’t seen for a decade, meaning that the economy is back on track. Economies around the world are in a synchronized upswing and populist pro-business, anti-tax & regulation politicians are challenging establishment politics everywhere. Meanwhile, central banks around the world are still slow to exit highly accommodative monetary policies.

At a recent visit to my local barber shop customers were debating the merits of the latest rise in bitcoins and if it is a good time to get in. My friends in the art world are still trying to explain how a questionable, poorly restored DaVinci painting could sell for $450 million, more than double the latest record set by a prominent Picasso. The public is starting to pay attention to the stock market and rising asset prices. The world is clearly awash in money and excess liquidity.

As a market practitioner since the late 1980s, 2017 felt much like the mid-90s when markets continued to move up despite plenty of pessimism and cautionary advice from strategists and policymakers. In fact, 1995 was the last near-perfect year and was followed by a few more years of 20%-plus returns. The key difference to the late-90s is the absence of inflation in the current cycle. If bonds, the largest global assets class, do not offer competitive yields, stocks will continue to be the only game in town. It is not lost on portfolio managers that exceptional years are often followed by higher returns, because asset allocators are often slow to adjust to new conditions.

At C.J. Lawrence, where we manage portfolios for private clients, we try not to get too caught up in the macro debate but continue to find value in traditional growth sectors: Technology and Healthcare. Both of these sectors’ P/E (price-to-earnings) ratios, based on 2018 estimates, trade at no premium excluding cash to the S&P 500 while defensive sectors like Utilities and Consumer Staples sell at a premium to the market on the same measure. This should be in reverse. Free cash flow yields and returns on invested capital (ROIC) are also significantly higher for technology and healthcare stocks.

There is no doubt that there is plenty of optimism in 2018, not only among market practitioners but also increasingly among the investing public. Retail investors have been largely on the sidelines during the “great recovery” in stock prices off the 2009 low. In fact, inflows into bonds have trumped inflows into stocks by a wide margin in the last decade. History teaches us to be vigilant at this point in the cycle but also not too cautious. We believe 2018 could be another good year for the patient investor.

CRN: 2018-0118-6335 R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit



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