2017: A Dickens of a Year

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Dec 19, 2017 1:40:30 PM

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2017It was the best of times, it was the worst of times. Catchy beginning, yes? Dickens certainly used it to good effect. As I was thinking about 2017 in retrospect, it seemed almost unavoidably appropriate.

The best of times

Looking at the economy and financial markets, it really doesn’t get much better than where we are right now. Markets are up significantly around the world and at all-time highs here in the U.S. Employment is at all-time highs as well, with key metrics like the number of people filing for unemployment or available for work close to all-time lows. Many metrics are close to or even above what we saw in 1999–2000, the last major boom time. In this sense, it really is the best of times.

The worst of times

All of the good times have happened despite rising political divergence and governmental dysfunction—in the U.S. and abroad in Germany, Spain, and Austria. We face a new cold war with Russia, China continues to rise, our troop commitments in the Middle East and Afghanistan drag on, and the prospect of war with North Korea is a real possibility. From a political perspective, both here and abroad, this is close to the worst of times and harks back, in many respects, to the Vietnam era.

Shades of gray

But going further into Dickens, we can also see that “it was the age of wisdom, it was the age of foolishness . . . in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”

As good—and as bad—as 2017 has been, we don’t need to limit ourselves to superlatives. Indeed, we need to take a more nuanced view to really see the shades of gray that can guide us going forward. Here are some thoughts about 2017 and what they might mean for 2018.

The economy. Although many metrics are quite strong, others are not. Wage growth has been subpar throughout the entire recovery, for example. That may start to change, as the supply of workers runs out and companies compete harder to hire. But it also highlights another concern: job growth is slowing down. Similarly, while confidence is very high and spending is rising, the savings rate is down to dangerously low levels, which is likely to constrain future improvement.

Politics. Markets have largely ignored geopolitical risks, rising even as ballistic missiles arced over Japan and North Korea detonated what may have been a hydrogen weapon. Several analysts I respect anticipate that the North Korean crisis will worsen in 2018, and the ability of markets to ignore it is likely to be tested even further. Here in the U.S., markets have benefited from the hope and, possibly, accomplishment of substantial policy change by the Republican Congress. Next year’s midterm elections may present a very real possibility that the Democrats will take control of at least one chamber of Congress, which would bring gridlock back in a big way. The policy hopes that have driven markets higher are likely to at least pause during the election process—and may reverse afterwards.

A return to normal in 2018?

In 2018, we will likely see neither the worst nor the best of times. Instead, there may be a reversion to normal: normal responses to political events, normal political gridlock, and, most likely, normal economic and market behaviors. Volatility will probably revert to normal and market gains (if any) to much more normal than this year’s terrific results.

My prediction late last year that 2017 would be a lot like 1999 is looking quite prescient. We will take a more detailed review early next year, when all the data comes in, but I suspect it will show the comparison holds. A return to normal in 2018 would make that year look like 2000. We will see.

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