American Consequences - January 2018


Retail sales, new-home sales, and personal spending all exceeded expectations and provided the gravitas needed to sustain the current eight-year bull market.

BITCOIN PRICESWERE CUT IN HALF as regulatory rhetoric rose. The cryptocurrency lost as much as 52% as China and South Korea got behind efforts to clamp down on bitcoin trading. China wants to ban trading digital currencies altogether, while South Korea explored more regulatory control. The U.S. also said it was considering stricter regulatory measures. In developed markets, the S&P 500 Index was up 1.1% in December, capping a year in which it returned 21.8%. The Dow, Nasdaq, and Russell 2000 also made all-time highs during the month. Bonds also posted gains for the month of December. The yield curve continued to flatten and the 10-year yield decreased two basis points (bps) to 2.40%, even though the Federal Reserve raised the fed-funds target 25 bps to a range of 1.25-1.50%. The U.S. economy maintained its growth trajectory, and job gains continued to exceed the 200,000 level. The Institute of Supply Management and Purchasing Managers Index (PMI) stats were stellar, while the revised third- quarter GDP growth remained comfortably above 3%. The most significant development during the month was President Donald Trump signing into law the GOP’s tax cut and reform bill. This watershed event also helped investment


Scott Garliss

In summary...

John Gillin Greg Diamond

Global growth continued to rule the markets last month. China, Japan, the eurozone, and the U.S. all reported economic data confirming this trend. The tax-reform debate in the U.S. was again the biggest driver. As 2017 turned into 2018, there was talk that tax reform may have a larger economic benefit than originally thought. No statement was more poignant than that of Federal Reserve Bank of Cleveland President Loretta Mester who said that her estimate of 0.25 to 0.5 percentage points of growth over the next two years might be too low. Markets began the new year much as they finished the last – by setting new all-time highs. Currently, the biggest argument against owning the market is valuation. Pundits are worried that the market’s price to earnings (P/E) multiple is way ahead of itself. And who can blame them? According to LPL Financial, for the first time ever, the S&P 500’s total return was positive every month of the year. While it’s hard to argue against a near-term pullback, one must pay attention to the growth potential. Comments like the one made by Mester can’t be taken lightly. If the market is underestimating the growth benefit of the tax bill, that would imply the market’s P/E multiple is incorrect. Earnings estimates

psychology around future projects like infrastructure and regulatory reform.

12 January 2018

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