Market Insights for December 2017

2017 started well for foreign markets following the inauguration of Donald Trump, and the US market in particular has continued to outperform all year.  Starting around the 21,000 mark, the Dow Jones index is up about 22% this calendar year.  This is now the second-best bull run since World War II with the run extending for over 7 years.

The US economy continues to do well with corporate profits at an all-time high largely thanks to increasing global sales.  Almost half of all revenue generated by US companies is now made from sales outside the US.  The outlook for the global economy remains positive so this should fare well for Wall Street in 2018.

The only obstacle in the path of the US economy is the possibility of wages growth and low unemployment.  Combined these could add inflationary pressure on prices and force the US Federal Reserve to increase the speed of interest rate increases.  This could put pressure on US markets and increase demand for the US dollar.  Both will have a negative impact on our market too.

Our market in comparison is only up about 5% this year, about 9% if dividends are included.  It was good to see it hit 6,000 points after such a long time floating between 5,500 and 5,900.  Non-mining investment improved, as did infrastructure spending and exports.  Continuing low wages growth and low inflation held the RBA from making interest rate increases which would negatively impact our market.  If the global economy continues to do well this will continue the demand for our commodities and good so we should see similar growth in 2018.

The main worry for our market is the Royal Commission into the banking sector.  Finance companies make up 25% of the Australian share market so if the commission unearths other issues we could see a sell off that negatively impacts the entire market.  Otherwise if nothing significant is found banks could see significant inflows from investors as confidence returns, lifting the market.  That will be interesting to watch.

Markets around the world are now slightly above fair value prompting some economists to believe that a general sell-off could be on the cards sometime in 2018 as investors will want to protect profits already made.  Any number of triggers could cause a sell-off but the longer-term view is to hold rather than try to time the market.

So I tend to think that 2018 will be positive, but we’ll be keeping an eye on the Royal Commission into banking and US inflation as the main drivers of market instability.

afr.com, ‘Resources the only hope for the sharemarket in 2018’, 11/12/2017

ampcapital.com.au, ‘Review of 2017, outlook for 2018 – still in the “sweet spot”, but expect more volatility ahead’, 11/12/2017