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Quarter 4, 2017

It was a good (no, make that great) year for stock investors. The market averages moved persistently higher throughout the year, with relatively few pull-backs along the way.  Stocks took their cue from the economy which has not only demonstrated resilience, but acceleration across a broad spectrum of economic measures.  While President Trump may be a controversial figure, he has certainly been an inspiration to many business leaders, particularly small companies which represent the backbone of the economy.  For the year the S&P 500 Index gained 19.4%, led by the technology sector.  Defensive sectors such as utilities and consumer staples (i.e. dividend stocks) were laggards in what was a spirited market.

Many individual investors are concerned by the fact there hasn’t been a significant market correction in the past couple of years. After living through the dotcom bubble of 2000 and the housing/credit meltdown of 2007 it’s hard to tempt the public into believing that the market can continue to rise for any extended period of time.  Investors have been conditioned to expect some form of a market crash every few years.  The media seems more than willing to perpetuate these fears.  If you happen to only watch CNBC you are probably uneasy because it seems every other guest on that network has been calling for 10% pullback in the market (of course these “experts” are probably hoping for a 10% correction because they also failed to predict the markets recent advance).

It’s all about earnings when it comes to assessing the market. For several years analysts consistently over-estimated earnings for a wide variety of industries and individual companies.  Up until this past year analysts were forced to consistently downgrade their revenue and earnings estimates throughout the calendar year.  That trend abruptly ceased in 2017.  For the first time in many years analysts have actually been raising their forecasts instead of lowering them.  Importantly, top line revenue growth has begun to accelerate for many companies.  Earnings for the S&P 500 index are estimated to have increased by 17.5% in 2017 (final figures will be available in late January).  For the current year (2018) earnings are projected to rise by an additional 16%.  This latter figure may actually prove to be low as many analysts have not fully factored in the recently passed tax reform legislation.  The top corporate tax rate will be lowered to 21% from 35% beginning in 2018.

Corporate tax reform will likely act as a stimulant for additional job creation and increased wages. After the recent passage of the tax reform legislation a number of large corporations have already come forward and announced extra year-end bonuses for their employees and higher minimum wage rates.  More jobs and higher wages will spur additional consumer spending in the current year.  Even before passage of the tax legislation MasterCard was reporting stronger holiday consumer sales growth (+4.9% versus the prior year- representing the highest growth rate since 2011).  Government economic statistics offer confirmation that consumer sentiment is riding high, as the most recent consumer confidence report jumped to a 17-year high.  A strong consumer should help lay the foundation for a vibrant economy in 2018.