Last January, just for kicks, we initiated our own informal and, yes, unscientific, assessment of expert forecasts. Specifically, we saved an article from the Wall Street Journal summarizing 15 Wall Street strategists’ U.S. market outlook for the year ahead (similar, of course, to many articles that typically appear in the financial press at the start of a new year).1 We are now officially in “ex-post” territory, so let’s compare the two: the expected versus the actual.
Unsurprisingly, given the general zeitgeist at the time, particularly on the heels of Brexit and the surprising (to most) U.S. presidential election, along with populist insurgencies possibly tipping the scale in other key forthcoming 2017 elections, the group’s average forecast “was the least optimistic since 2005,” with a projected return for the S&P 500 of just 5%. Moreover, the article stated that “the gap between the most optimistic and pessimistic forecasts (was) the smallest on record dating back to 1999.”
Suffice it say that 2017 took many pundits by surprise, with the S&P 500 posting a total return just shy of 22%. While other market segments to which you are broadly exposed, namely domestic mid- and small-size company stocks, as well as real estate investment trusts, registered less impressive albeit positive returns, it was a relatively strong year across the board. Indeed, this was the case globally, with many international indexes, particularly those dominated by larger size companies, reaching new records or multiyear highs, a welcome respite after several years of foreign markets generally lagging their domestic counterparts. Again though, as is inevitably the case, there were “leaders” and “laggards” among the various stock components of your portfolios. Their rankings, of course, shift each year in a capricious fashion, thus bolstering the rationale for broad asset class diversification, at all times.
Also to the surprise of many, particularly in spite of the circumstances cited above and other events that followed (saber rattling with North Korea, continued terrorist attacks, a series of natural disasters, etc.), the U.S. markets enjoyed one of the calmest years on record. According to a subsequent Wall Street Journal article that appeared in October, the S&P 500 had, up to that time, moved 1% or more in either direction in one trading session on just eight occasions during the course of the year, the fewest number for a comparable period in more than four decades. As the article aptly concluded, “It is an outcome few had predicted at the end of last year, showing once again that the markets always seem to defy expectations.”2
Even so, one might ask whether we’re experiencing the proverbial calm before the storm, particularly given that volatility is often cited as a contrary market indicator. The truth, of course, is that no one, including the experts, knows for sure. With that said, in light of elevated valuations resulting from the current bull market—the second strongest and the second longest over the past 90 years—it is fair to assume that stock returns for the next five to ten years, particularly in the U.S., might be more subdued than what we’ve experienced since the lows of the global financial crisis. How these returns will manifest over the next several years, and certainly in any particular year, such as 2018, remains as unpredictable as ever.
Similarly, as far as the fixed income markets are concerned, we continue to keep our expectations modest. Despite the Federal Reserve signaling continued future increases in its overnight lending (“fed funds”) rate, and an eventual post-crisis normalization of monetary policy outside of the U.S., yields could remain relatively low due to secular forces that may dampen longer-term growth and inflation. Indeed, the current 2.4% yield on the benchmark 10-year U.S. Treasury note remains close to where it was at the start of the 2017—and, for that matter, the start of 2016.
Bottom line, our advice for a potentially less generous environment ahead parallels what Vanguard eloquently stated in a recent report:
“The solution is not shiny new objects [our translation: “silver bullet” investment products] or aggressive tactical shifts [market timing], but rather the need for investors to remain disciplined and globally diversified, armed with realistic return expectations and low-cost strategies.”3
To that we would add that globally diversified includes allocating an appropriate amount of humdrum (i.e., lower yielding yet conservative/stable) fixed income investments to cover anticipated short- to intermediate-term needs, just as we’ve always counseled. This strategy makes sense in any environment, as it can mitigate the need to tap the stock portion of one’s portfolio during those inevitable, and unpredictable, periods of market weakness.
Turning our attention to general financial planning matters, of course there is big news on the tax legislation front. We will continue to let you know of anything within our purview that is worth considering, but if you haven’t done so already, we strongly encourage you to contact your tax professional to ascertain any specific, personal ramifications. As usual though, we offer some key items and figures to keep in mind for the upcoming year:
- The maximum federal tax rate on qualified dividends and long-term capital gains remains 20%, but only for taxpayers who are in the highest marginal income tax bracket (which, as a result of the new legislation, is being reduced to 37% from 39.6%, through 2025). Investors below this threshold will continue to pay a maximum 15% rate on qualified dividends and long-term capital gains. However, these figures do not include the 3.8% Medicare tax on so-called unearned income for singles earning more than $200,000 and couples earning in excess of $250,000, as mandated under the Affordable Care Act.
- Maximum IRA contributions remain $5,500 for those younger than 50 and $6,500 for those aged 50 and up.
- Eligibility income ceilings for Roth IRA contributions increase, with contributions phasing out at adjusted gross income thresholds of $189,000 to $199,000 for married couples filing jointly and $120,000 to $135,000 for singles.
- The annual contribution limit for 401(k), 403(b), and 457 plans increases to $18,500 (from $18,000) for those younger than 50 and $24,500 (from $24,000) for those aged 50 and up.
- The limit on defined-contribution plans (Keogh profit sharing and SEP-IRA) increases to $55,000 (from $54,000); those aged 50 and up can contribute $61,000.
- The federal estate, lifetime gift, and generation-skipping tax exclusions, which remain uniform and indexed annually to inflation, increases to $11.2 million per person ($22.4 million per married couple). This threshold was doubled as a result of the new legislation and is set to expire in 2025. The top tax rate remains 40%.
- The annual gift tax exclusion amount increases to $15,000 (from $14,000) per recipient.
- Finally, the new legislation has expanded the use of 529 college savings plans to include K-12 private school tuition. This particular provision has an annual tax-free distribution limit of $10,000.
Whatever may be in store for 2018 and beyond, please be assured we will continue to apply the same standards and time-tested approach that have served our clients well over many years. We remain grateful for your continued confidence, and wish you and your loved ones peace, health, and happiness in the New Year.
1. Steven Russolillo, “Street’s Strategists Run as Pack in ’17,” Wall Street Journal, January 5, 2017.
2. Ben Eisen, “The Lesson to Be Learned from a Placid Market,” Wall Street Journal, October 4, 2017.
3. Vanguard Market Outlook, December 2017.