It is hard to believe that we are nearing the end of 2017. Time sure does fly when you’re having fun, and the markets are up! Indeed, investors have cause to celebrate, as global stocks are up over 20% for the year, with emerging market stocks leading the way. This strong performance is admittedly unexpected (and somewhat confusing) as economic indicators are mixed. While GDP growth has improved in the U.S., it is off a weaker base than what we have seen in the past. Unemployment, while continuing to decline, has not led to significant increases in wage growth. Either way, we can look back at the year and acknowledge that the results have turned out better than most would have expected heading into the year.
The question we are left asking is, what does this mean as we look forward? This research report by our colleagues at Asset Consulting Group dissects one of our shared Investment Themes we have been discussing with our families during the past several years (but have not yet seen come to fruition): the long term view of muted returns going forward. While we are encouraged by specific trends, and the momentum in the equity markets is overwhelmingly positive, disciplined statistical analysis suggests returns may be getting ahead of themselves. Some might argue we are borrowing future returns into the present. The primary factors that contribute to this perspective are higher equity valuations, low global growth, and rising interest rates that will be a headwind for bond portfolios.
So when we caution families to prepare for muted returns going forward, how can we avoid feeling like the investment reincarnation of the Grinch, peering down the mountain at all of the strong returns and seeing only caution in our outlook? To be fair, optimism isn’t all lost as we recognize that we are at a point in time when innovation and technology could be setting the stage for a prolonged period of real growth. There are many examples of industries and behaviors that are being transformed by technology. We need look no further than the relatively recent phenomena of Cyber Monday as analysts expected sales this past Monday to top $6 billion—a far cry from the ~$500 million in online sales when the term originated in 2005. The increases are not just on the consumer end. We have become more efficient producers as well. Even in one of the more recently beleaguered industries, Energy, we have seen the average cost of U.S. shale production drop from around $60 per barrel in 2014 to just above $40 per barrel in 2017. In short, we are not only becoming more efficient, but we also have the opportunity to improve quality of life through innovation and the overall improvement of the goods being produced.
Here we find ourselves, at the balance between optimism and caution, looking for both the sunrise and icebergs on the horizon. At this point, we do not see anything that is causing us to alter our course, but rest assured we are spending a lot of time in the Crow’s Nest. During this holiday season we also want to take the time to say thank you for the opportunity we have every day to work with your families. We wish you all a happy, healthy and safe holiday!