A very merry Christmas

 Equity markets were further boosted on Monday by the expectation that Donald Trump’s tax reforms will be ready for him to sign by the year-end. 70 closing record highs for the Dow Jones index in one year, never happened before. It’s been a year that not many would have forecast. The well-worn description throughout the year for investors has been Goldilocks, everything just right for risk assets. Will Goldilocks fade in 2018? If she does how slowly will she fade? Deutsche Bank expects European company earnings to grow circa 2% in 2018, this is despite their expectation that the eurozone economy could grow at closer to 3%, based on current readings from the Purchasing Manager Surveys. Despite this optimistic outlook for economic growth in the region they expect the eurostoxx 600 to finish the coming year only a few percent higher than where it currently sits.

Investment banks remain optimistic for the year ahead Credit Swiss, and UBS both forecast more double-digit gains for the S&P 500 for the coming year. They believe that Goldilocks will ensure equity prices remain underpinned. Volatility, or the lack of it, has been a theme of 2017. The lack of volatility has remained despite the most distinct change in monetary policy stance from the leading economies of America, Europe and the UK, all of which have tightened monetary policy to some degree or another. Risk assets have been able to weather this change in sentiment as the outlook for global economic growth has improved to the point now where forecasts are for the global economy to grow circa 3.5% next year.

What could go wrong to knock this bull market off the pedestal? As always it will be something no one suspected. Things that have surprised many speculators is the rise of Bitcoin. The trouble for many investors is how do you truly value such an asset. There is nothing to compare it against. It is not backed by an asset, or a central bank. What is the greatest risk? Probably some sort of intervention from a central bank or government.

Political uncertainty has dogged 2017, yet equity markets have largely ignored this. Firstly, North Korea, has barely caused a ripple. If investors were told at the start of the year Merkel would fail to form a government by the year-end, it a safe bet to assume they would believe that would have unsettled capital markets. The constant cloud that overhangs Donald Trump’s presidency has likewise been largely ignored. According to a Bloomberg report on an investor survey carried out by Absolute Strategy Research investors see the probability of equities being higher this time next year at 61%.

To all those who read my commentary, I wish you a very merry Christmas.  

Posted on December 19, 2017 .