President & CEO Dan Kraninger reflects on 2017 and provides insight moving forward
“The greatest trick the devil ever pulled was convincing the world he didn’t exist.”
- The Usual Suspects (1995)
My wife and I like the movies. We go throughout the year but between Christmas and New Year’s, we really pick up steam. With the cold weather, time off work, and family gatherings, we certainly didn’t disappoint this year. One in particular stood out and I’m glad we saw it again -- The Usual Suspects. Interestingly, the line above hit me as soon as I heard it as the lead in to this quarter’s letter. I’ll simply change a few words -- the greatest trick the market ever pulled was convincing the world volatility didn’t exist.
Consider volatility. Despite the geopolitical maelstrom in 2017, the North Korean conflict, fear of China’s economic slowdown, the stock market’s advance, and instability in South America, the stock price daily volatility of the S&P 500 Index was the lowest in a half-century. You have to go back to 1964 to find the average daily change for the market as low as it was in 2017.
Further, the S&P 500 Index hasn’t closed 3% below its all-time high since the 2016 November elections. This current 14-month streak is the longest ever.
The biggest decline during the year in 2017 for the Dow Jones Industrial Average was 3.4%, and that’s the second lowest for a single year ever, behind only 1995. And then there’s this; the S&P 500 was positive each calendar month for 13 months in a row; the last time this happened was in 1959 (that run lasted for 15 months).
Ok, so now what? First, take time to review your portfolio and life changes with our advisory team. It’s a best practice -- clients who take advantage of these discussions at least annually do better over time. During those calls, here’s what I believe investors should be thinking about in 2018:
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Rebalance Your Portfolio |
After big years, many clients find themselves more concentrated in one asset class or even a single position. Are you concentrated in Apple or Amazon stock? We offer concentrated stock strategies with options to help clients unload concentrations with tax sensitivity. |
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Seek Alternative Income |
Kind of a drumbeat for us for the last 18-months but it still makes sense. The U.S. bond market made +3.5% last year and we don’t anticipate better in 2018. There are other, alternative ways to generate income. Take a look at Tactical Income or Zero Beta. |
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Look Overseas |
Although the S&P 500 had a good year, Europe had an even better year with a 27% gain, while the Pacific region advanced 28.9% and emerging markets surged 37.4%. Even Japan, mired in slow growth for ages, outperformed with a 24.3% gain. A global economic recovery and improved corporate profits worldwide deserve the credit and should be included in any equity portfolio. |
Also, remember what John Templeton said -- “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.” Try and keep a level head and let data, discipline, and common sense be your guide. We are monitoring daily and will make the necessary changes in our tactical strategies when the data suggests. You can see on the following page that we are near fully invested heading into 2018. Valuation metrics are stretched in the U.S. but offset by other good factors.
In closing, thank you for your business. NorthCoast had a terrific year across the board in 2017 and I’m proud of how we navigated risks and returns. Our international and buy-and-hold strategies in 2017 were +22-27%. Our hedged strategies (portfolios that hold cash at times to mitigate some market decline) were +17-20%. And our income and low correlation strategies were +6-8%. Without you, of course, there is no business - so again, thank you.
From all of us, Happy New Year and best wishes for a happy, healthy, and prosperous 2018!