Ocean Reef Speaker Series
Topic: 2017 Market Review and Outlook for 2018
Speaker: Doug Moffitt, EVP of Wealth Management for Gibraltar Private Bank & Trust
Presented on January 16, 2018
We were pleased to have Doug Moffitt as our featured speaker for our January event at the Ocean Reef Club. We had over 50 attendees and although we were hoping to hold the event outdoors at the Point, we ended up moving it inside due to a bit of chilly and windy weather. However, the wine and hors d’ oeuvres still tasted just as good!
If you missed the event, here is a summary below of Doug’s presentation.
Summary of Doug’s Market Commentary
2017 was a generally strong year for most markets both in the U.S. and around the world. While the S&P 500 was +21.8% (Total return, including dividends), there was greater strength in International (+25.4%) (1) and Emerging Markets (+37.3%) (2). Within the US, large cap stocks performed generally better than mid and small cap stocks; and growth stocks generally outperformed value stocks, led in particular by technology. In fixed income, the US core bond market was +3.52% (3). Although the Federal Reserve raised rates three times (from 0.75% to 1.5%) the 10 yr. Treasury bond yield finished the year where it began, at approximately 2.4%.
So what were the key drivers in 2017? There were essentially three:
Strong earnings growth
Strong global GDP growth
Later in the year- the anticipation and eventual passage of tax reform in the United States.
On the earnings front, the S&P is expected to have increased approximately 11% to $131 per share, which would be the first year of meaningful earnings growth in a while.
On the economic front, US real GDP is also expected to have accelerated from 1.5% in 2016 to 2.2%* in 2017, with the expectation of accelerated growth to 2.5%+* in 2018, further enhanced by the potential benefits of tax reform. The US economy in particular is widely seen as one transitioning from a period of monetary stimulus supported by low interest rates and Quantitative Easing (QE), to a more traditional cyclical recovery, supported by fiscal stimulus (i.e. tax reform) augmented by low and still declining unemployment, rising wages, a gradual increase in inflation, and companies investing more in their business. In Developed International markets, real GDP is expected to have accelerated from 1.1% t0 1.6%* in 2017, and Emerging Markets generally are expected to show accelerated growth from 4.4% to up 4.5%*. Overall 2017 global growth is expected to have seen an increase from 3.2% to 3.5%*. Each of these markets is expected to see GDP accelerate again in 2018.
Finally, the passage of tax reform in December has caused analysts to revisit their US GDP and earnings outlook for 2018.
2018 Economic Outlook
Toward the end of last year, the consensus 2018 S&P earnings estimate was $145 per share, approximately +11%. Given the passage of tax reform in the U.S., some analysts have indicated that those earnings could exceed $150, closer to a 15% increase. Global GDP is expected to increase 3.7%,* with the US at 2.5%+*, Developed International Markets +1.8%*, and Emerging Markets +4.8%*. The Federal Reserve is expected to raise rates 2 to 3 more times and the 10 year Treasury yield is expected to move higher toward 3.0%. These positive economic expectations beg the question; what do the markets do in 2018?
The S&P 500 finished 2017 at 2,674, which represents a valuation slightly above 20x estimated S&P 2017 trailing 12 months earnings of $131. This is expensive vs. the historical average of about 15-16x earnings – so the market is pricing in much good news. In addition, interest rates are still relatively low vs. historical levels which helps support a higher valuation. This backdrop is helpful for putting 2018 in context.
We cannot know where the market will finish the year, however if economic fundamentals remain strong and earnings accelerate, absent unforeseen geopolitical or other events (i.e. significant inflation increase), the S&P could maintain its estimated yearend 2017 valuation (20x) and increase with earnings growth. At 2018 consensus earnings range of $145, that would imply a market of 2900. If higher earnings of $150 are realized, that would imply a market of about 3000. This would also require the market to have expectations for continued good growth in 2019 as we progress through the current year. Should earnings growth prove to not be as strong as the market currently anticipates, or if confidence in 2019 earnings growth wanes as we approach yearend 2018, then the market will be viewed as too expensive, its multiple will contract and the S&P will decline. In summary, valuations are high but the consensus is that fundamentals are strong. It will be important for the market’s confidence to be reinforced with continued good economic and earnings data throughout the year for it to continue its current path. Globally, the greatest growth is expected to come from emerging markets. Despite their strong performance in 2017, emerging market growth is expected to accelerate again in 2018 while their overall valuation is lower, making it an attractive sector on a relative value basis. In fixed income, given the expectation of continued rate hikes and a gradual increase in longer maturity bond yields (i.e. 10 yr. Treasury), the fixed income market is generally expected to provide flat to low single-digit returns.
What to Do?
Above all; have a plan. Each of us has unique goals and objectives, as well as different levels of risk tolerance. In addition, each goal has a different time horizon and therefore requires its own strategy.
We recommend focusing on what is the most appropriate asset allocation for each investment objective, and practicing the discipline of rebalancing your portfolio periodically to maintain that asset allocation, regardless of what the markets are doing. Asset allocation is the primary determinant of your return over time, so being disciplined about maintaining it is important. This also reinforces the importance of diversification in portfolios, which protects against too much exposure to any one asset class. It is difficult to time the market, but diversification and disciplined rebalancing can provide competitive risk-adjusted returns over time. Tactically overweighting or underweighting a given sector at different times in the economic cycle, as well as good manager selection, can enhance performance. However, disciplined asset allocation will be the greatest long term contributor to results. If we do this, we can be less stressed about the markets and make decisions in a more “dispassionate” manner.
Douglas Moffitt, Executive Vice President Director of Wealth Management
Mr. Moffitt is an Executive Vice President, and Director of Wealth Management. He has over 30 years of experience in the capital markets and investments industry. Prior to joining Gibraltar, he served as Managing Director and head of the New York investment department of US Trust. During his career, Mr. Moffitt also served as head of investments for Geneve Corporation, a privately owned holding company/family office, as a Director in the institutional equities division of Credit Suisse First Boston, and as a Managing Director in the equities division in New York for Goldman Sachs. He has a history of community involvement, most notably serving as a charter Board member of the Stanwich School in Greenwich, CT where he served for nine years as head of strategic planning, capital campaign co-chair and chairman of the Board of Trustees. Mr. Moffitt earned his BS in communications from Northwestern University and his MBA in finance and marketing from Northwestern University (Kellogg).
1.) Blackrock International Equity Index
2.) State Street Global Advisors Emerging Markets Index
3.) State Street Global Advisors Core Bond Index
*LPL Financial Outlook 2018
This information is not meant as a guide to investing, or as a source of specific investment recommendations, and Gibraltar Private Bank & Trust makes no implied or express recommendations concerning the manner in which any client’s accounts should or would be handled, as appropriate investment decisions depend upon the client’s investment objectives. The information is general in nature and is not intended to be, and should not be construed as, legal or tax advice. In addition, the information is subject to change and, although based upon information that Gibraltar Private Bank & Trust considers reliable, is not guaranteed as to accuracy or completeness. Gibraltar Private Bank & Trust makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information.
Investment Product: Not FDIC Insured • No Bank Guarantee • May Lose Value • Not a Deposit • Not Insured by Any Federal Government Entity