2017 was an incredible year: we saw stock market valuations and indexes at all-time highs, a continuing rebound in real estate prices, lower than expected levels of inflation, and an economy that has exceeded all expectations. What should investors and other interested parties expect in 2018? Let’s review what happened in 2017, and then project what we expect should occur in 2018.
2017, a year in review:
Inflation: The average consumer price index (CPI) through November 2017 was 2.0%, per the Bureau of Labor Statistics (BLS) website. This was lower than expected, but was explained by the Fed as the “flattening out” of the Phillips curve (relationship between unemployment and inflation). Ken Fisher of Fisher investments stated in an article in USA Today that the Fed was wrong, and it was due to the amount of money being removed from the money supply by the Fed’s Quantitative Easing (QE) program.
Stock Market: The Dow went from 19,831.76 at the beginning of the year, to 24,719.22 by year’s end – an increase of 24.6%. Boeing (BA), a major component of the Dow Index rise, went from 156.97 to 294.91, a startling increase of 87.9%! However, that was nothing compared to the incredible rise of crypto currencies, in particular, Bitcoin (BTC). Bitcoin mania has everyone intrigued by the potential of fast money; it went from 1,017.05 at the beginning of the year, to peaking at 19,345.49 on 12/15, and ending the year at 13.444.88 – an increase of 1,222%!!
Real Estate: The rebound in prices from the implosion of the 2008 financial crisis continued throughout the year. Real Estate continues to be a great investment, both as a fixed asset and as a hedge against inflation. The average increase in property values across the country was about 6% this year, and about double that value on both coasts. In addition, according to an article by Miles Udland on Yahoo Finance, home-builder sentiment is at its highest levels since 1999. It remains to be seen what the potential impact of tax reform will have on the current investor appetite for housing.
Business: In terms of Gross Domestic Product (GDP), the economy was unexpectedly strong. It was over 3% for the second quarter in a row in 3Q17, and for only the third time in three years (source: Bureau of Economic Analysis, www.bea.gov). This could be driven by the large amount of economic activity associated with recovery from the recent weather-related disasters (flooding in California, tornadoes in the Southern and Midwestern states, Hurricane Harvey in Texas, Hurricane Irma in Florida, and wildfires in the Western states).
Inflation: I expect inflation to continue to grow, above the 2% target set by the Fed. Regardless of the expected interest rate hikes planned for 2018, inflation will grow due the reduction in Quantitative Easing (QE) announced by the Fed. In addition, in an article/interview by Greg Hunter (USAWatchdog.com), he quotes Danielle DiMartino as saying that inflation will be going up in 2018.
Stock Market: I have frequently stated in this blog that I think the Stock Market is overblown, and I expect there will eventually be a correction. To be fair, I expected the correction to occur by now, but I didn't take into account the economic activity driven by rebuilding efforts from all of the weather-related disasters across the country. However, eventually the piper will have to be paid, and the market will see a correction.
Real Estate: I believe real estate will be the best protection against the dual challenges of increasing inflation and a stock market correction. As I have stated in other blogs on this website, money always seeks the highest returns, and when real estate is the only game in town (due to the coming stock market correction), it will again become the darling of the investment community.
Business: I have stated in multiple articles on this blog that I expect a recession in 2018. I still stand by that prediction. The current business cycle is almost as long as the longest expansion in history (the 1990s expansion), and it is no more than a year from passing that mark. Does anyone think the current economic cycle is stronger or could last longer than the one driven by the productivity enhancements created by the computer and internet age? I think not.