The Biggest Challenge for 2018 is Living Up to 2017
January 8, 2018
As we reflect on 2017, it was exciting to witness the best year in the market since 2013. But it wasn’t just a great year for stocks. When measured against the backdrop of a lack of pullbacks and depressed volatility, I think it was actually one of the best years ever for investors. And therein lies the major challenge for 2018.
Now don’t get me wrong, I do think stocks will move higher in 2018, and virtually all market experts are in agreement. However, there will be some vital questions that will impact just how exciting this year will be for investors.
For instance, how will investors handle increased volatility and possibly even the notion of a 5%-10% pullback at some point during the year? What makes this even more intriguing is that such a pullback could come in the aftermath of good news. We are not going back to the days of hoping for bad news – we escaped those a long time ago – but the current rally is on the cusp of being the oldest and longest running in history, which brings about a certain anxiety.
Investors have become complacent. The CBOE Volatility Index (VIX) – the so-called fear index – has swooned 51% in the past five years, with 21% of that happening in 2017, so investors have become spoiled. I can only hope that by being students of the market and understanding its psychology folks will be ready to make money from increased volatility and not blink at the first sign of trouble.
There is a lot of critical economic data expected out this week, including the all-important December jobs report on Friday. Across the board, economic data portrays an economy on fire, and I expect that to continue. That’s a boon to stocks in general, but keep in mind that until the last month of trading, 2017 was the tale of just five stocks carrying the entire market.
The big test now will be whether investors can rotate out of those winners and into fresh names and sectors. I do expect that will happen, and it should open up a lot of new opportunities for us.