So farewell then, 2017 – an extraordinary year for markets

The last 12 months have proved to be a great time for most investors – but the associated view of markets that the current period of low volatility will persist seems increasingly improbable



Kevin Murphy
Co-head Global Value Team

So how was 2017 for you?

If you had any money in any investments, the chances are you enjoyed a very good … scratch that, an extraordinary year.

To illustrate just how extraordinary, we could pull together a bunch of statistics from around the globe but why bother when Scott Irving of Jefferies International – a good friend of The Value Perspective, not to mention insightful, talented and kind to animals – already has?

Before I go into them it is worth noting that as with all investment figures, past performance is not a guide to how investments may perform in 2018- or any other year in the future.

Irving's numbers tell us, for example, even if you ignore dividends, the S&P500 finished 11 of the 12 months of 2017 in positive territory – and its only negative month, March, saw the main US stockmarket index down just 0.04%, which rounds up to zero anyway.

Furthermore, on 13 December, the S&P500 experienced its 60th all-time high of the year – a total only surpassed in 1964 and 1995. All things considered, it has been quite a year for US equities.

FANGs lead the way

Leading the way, of course, have been the four so-called ‘FANG’ stocks of Facebook, Amazon, Netflix and Google, which began the year with a bang … and then kept on going.

By 17 January, the quartet of tech giants had seen their share price grow by an average of 8.3% – the equivalent of adding $102bn (£76bn) of market capitalisation within just a couple of weeks’ worth of trading.

Given that, you will be unsurprised to learn growth had the upper hand over value.

As it happens, value has ended 2017 strongly – outperforming growth in each of the last three months, and significantly so in November and December. Nevertheless, growth outperformed value on the first trading day of the year and has not let up since – leading value in terms of year-to-date percentage gains for the whole of 2017.

Nor has the year offered much in the way of downside to disturb the serene progress of markets, companies and investors.

According to Irving, for example, the maximum drawdown – that is to say, the largest percentage drop – seen by five of the 11 S&P500 industry sectors in the first six months of 2017 was the smallest for any half-year period since 1990.

When markets are up, investors plough in

When markets are on the up, investor sentiment almost inevitably follows suit – and so it has proved over the course of the year.

By October, Irving notes, US financial giant Morgan Stanley was saying its client account cash levels were the lowest it had seen while, in December, US brokerage TD Ameritrade revealed its clients had been net buyers for the 10th month in a row, with activity by private investors at an all-time high.

Investors appear to have been spurred to even greater levels of optimism by Donald Trump’s recently-passed tax reforms so that, as 2017 drew to a close, the percentage of US household assets invested in the stockmarket stood at 40% – the historical average is 28% – while US retail investors had five times as much in equities as cash.

“We have not seen this much acceptance of risk since March 2000,” notes Irving.

Bonds also boomed

Nor is it just equity markets that have been booming. Turning to fixed income, we find Greek 10-year bond yields, which only a few years back stood at 19%, now at 5%; Pakistan issuing 10-year debt yielding a little over 7%; and Argentina – which has spent 75 of the last 190 years in default – raising $2.75bn through a 100-year bond also yielding just above 7%.

2017 also saw Ireland issue a bond with no yield at all while, by August, 72% of European junk bonds were trading below US treasuries.

In the world of corporate debt, meanwhile, the BBB-rated company Whirlpool was able to raise €600m (£532m) of 10-year debt at 1.1% and three-quarters of the leveraged loan market was ‘covenant-lite’. In 2009, according to Moody’s, the equivalent percentage was just 2%.

Extraordinary, as we say – although, to be fair, a lot of the economic numbers do now look very positive.

Economic numbers do look positive

In Europe, for example, purchasing managers’ indices, which measure business sentiment, are at their highest levels for 80 months – and significantly more in the manufacturing sector – while job creation is at its highest level for 17 years.

Yes, it is likely markets will already be pricing a lot of this data in but it is still supportive.

At this point, you may be expecting us to wheel out our usual ‘reversion to the mean’ chat (things eventually go back to their average levels) and talk about all the things that could go wrong.

Our conclusion, however, is actually more benign than that.

Our conclusion

If strong economic data continues to come through, it is easy to imagine markets continuing the strong performance seen during 2017. Equally, if the data were to stumble even a little, it would be easy to imagine markets significantly lower.

What is difficult to imagine, however, is that markets simply stay where they are – that, following on from such a significant rally, they simply flatline.

That, however, is the extraordinary implication of the VIX volatility index and its current standing at all-time lows. The VIX is a measure of how volatile investors believe the markets to be in future. 

What does this mean?

Analysis shows football goalkeepers would save a third of all penalties if they simply stayed where they were, in the centre of the goal, rather than diving to the left or right.

After a truly extraordinary year, however, it does not seem right to predict the markets shoot straight down the middle and stay flat.

Perhaps the VIX index is correct and perhaps we are making the same mistake as the goalkeepers but, if pushed to make any sort of forecast for the year ahead, we would side with the goalkeepers and see the market moving aggressively.

Whether it is to the left or right, only time will tell …

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Kevin Murphy
Co-head Global Value Team


The Value Perspective
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