Notes

New Year Rundown

This past year was another barn-burner for stock markets around the world.  Of all the major international indexes, every one ended the year in positive territory.  The best performer was the Argentine Mervel Index which increased 78% for the year, while the Russian RTS Index brought up the rear with a positive return of 0.2%.

U.S. stocks have performed well recently because global economic fundamentals are sound and corporate earnings are strong and potentially getting stronger.  But what is the market going to do from here?  Will it go higher?  Is the market overvalued?

The first two quarters of 2017 proved to be profitable ones for investors. Over that period, the S&P 500 stock index appreciated 8.2% before dividends. The best performing sectors of the S&P 500 were its two largest: information technology and healthcare. Combined those sectors account for approximately 37% of the index.

In the investment world, it is an accepted principle that there is a direct relationship between risk and reward. Generally, stocks of safe, slow-growing companies sell at lower valuations than risky, fast-growing ones.

The fourth quarter of 2016 proved to be an eventful one for America. In November, a large portion of the populace decided it was time for regime change in Washington. Fair enough. However, many questions remain about what kind of government we are going to get and how exactly its policies will affect the U.S. economy and, by extension, the financial markets.

That is the term used by professors of finance to describe “an event outside the economic system that affects its course.”  Just last week, we experienced one.

Have the currency markets stabilized? Below is a chart of the value of the U.S. dollar compared to a basket of international currencies. US Dollar Currency Index (DXY)

Despite a decent performance by the U.S. economy, the stock market turned in lackluster results in 2015. The unemployment rate dropped to levels not seen since before the financial panic of 2008/2009. Real GDP growth for 2015 chugged along at a steady, though unspectacular rate of about 2¼ percent. Real estate values continued to recover from the big sell-off.

Equity markets took a beating during the third quarter of 2015, losing 6.9% as measured by the S&P 500 Index. Worries about the possible effects of China’s economic slowdown caused investors to shun stocks and seek safer assets such as U.S. government debt.

The healthcare sector remains one of the most promising areas for investing and should occupy a prominent place in most stock portfolios. Over the past ten years, healthcare stocks have significantly outperformed the overall market as shown by the graph below.