Obviously, a ‘2017 in charts’ column is a bit of a cliché. At the same time, many investors suffer from a severe case of calendar-year-thinking and probably can’t get enough of looking back. But there is another reason for why I join the ‘year in charts’ craze. It also offers a little bit of additional insight into the vagaries of financial markets.
For example, 2017 demonstrates that animal spirits, the instinctive and often elusive behavior of investors, should not be underestimated. No matter what the risks are, at times investors always find that one reason for why markets should go up. Valuation, especially for shorter-term horizons, are irrelevant. The same holds for political risks, which were again abundant in 2017. Finally, the jaw-dropping rise of the price of bitcoin underpins caution is warranted when assuming that extraordinary price movements that happened in the past, let it be of tulip bulbs or internet stocks, will not happen again.
Long live uncertainty
2017 starts with the biggest amount of uncertainty about future economic policy in at least 20 years. Investors are still digesting the Trump-presidency when tensions surrounding China (a massive pile of debt), France (possible LePen win) and the UK (Brexit) rapidly accumulate. That doesn’t sound as a good time to be buying equities. However, by the end of the first quarter, stocks are up 5.5%.
It’s March and the Federal Reserve hikes for the first time this year. The new dot plot promises two more rate hikes, a promise that is actually fulfilled by the Fed later in the year. This despite the fact that investors stubbornly refuse to believe the Fed’s rate projection. This sounds less odd than it sounds when you take into account that the Fed has ‘underdelivered’ on rate hikes in every year since the financial crisis.
Bitcoin’s rise to stardom
March is also the month in which bitcoin starts to shape the year. Early March, bitcoin is up 30% since the beginning of the year. But more importantly, for the first time ever does the price of bitcoin top the price (not value!) of its physical competitor, gold.
Meanwhile, US equities continue their stellar rise led by ‘FAANG’. As a result, more and more valuation measures are flashing red. We already knew the Shiller PE had risen to extremely high levels, but US stocks are expensive by pretty much every other metric as well.
April brought the next potentially ‘economy-derailing election’ that turned out for the best. LePen makes the second round of the French presidential-elections, before losing hopelessly to Europe’s next political star, Macron. The euro shoots up, starting a massive rally against other currencies including the USD that will continue throughout the rest of the year. If politics tell us anything, it must be that markets on average couldn’t care less about election results (Brexit, Trump or no LePen).
Age of central banks continues
May. And bitcoin is up a whopping 125% since January 1st. De mind-boggling rise of the ‘cryptocurrency’ is all over the media, drawing in hordes of new investors. Later in the year the bitcoin wallet Coinbase temporarily becomes the most-downloaded app in the Apple App Store. Someone who had invested USD 1000 in bitcoin back in July 2010 and never sold – there are very few people in this position – would now be sitting on a fortune of USD 35 million.
Unfortunately, 2017 was another year where markets were dominated by central banks. As the year progresses, it becomes clear that, while the Fed is slowly raising rates, other major central banks continue their extraordinary loose monetary policy. Even as the global economy is now in a full-scale upswing. Growth hits pre crisis levels pretty much everywhere (emerging countries excluded), raising more questions about the policies of Mr. Draghi and Mr. Kuroda. In August, the total amount of negative yield debt is still roughly USD 10 trillion.
Buy the dip
August is the only month in which global equities actually fall below the level at the start of the year. The number of fund managers that think stocks are expensive hits an all-time high. For a while it seems the relentless positive sentiment on equity markets is about the break down. Not least because investors, understandably, expect central banks to tighten their policies.
But, as so many times before, they don’t. Quite the contrary, central bankers have a way of convincing investors central bank stimulus is here to stay. No matter if it’s Yellen telling investors rates are going up or Draghi announcing that QE will be reduced, the dovish tone of their press conferences mesmerizes investors. Hence, interest rates remain extremely low despite the best economy in ten years. Monetary Madness also characterizes 2017.
During the last four months of the year, equity markets around the globe stage a formidable rally. And not just driven by central bank policy. Even though economists forecast a peak in global activity for months on end, the global economy manages to beat expectations every single time. Economic records are broken on a daily basis, especially in the Eurozone. Add to this, the fact that inflation numbers are still too low and Goldilocks is reborn.
So, what could be next? Equities are still expensive and from and economic standpoint things can hardly become any better. In addition, at least some investors are starting to worry about the future. The top recession-forecaster , the yield curve, has flattened significantly in recent months. Historically, a negative yield curve was followed by a recession in every single case. Mind you, a flattening yield curve, which is currently all over the media, tells very little about the probability of an upcoming recession.
2018 will again be a year where central banks are of major importance. But could their impact be different? It’s expected that the liquidity impulse will turn negative early 2019. With the exception of a short period in 2015, where central banks already signaled more stimulus, that will be the first time in more than ten years in which central banks will withdraw liquidity. And with another year of strong GDP growth and declining unemployment rates it will become increasingly difficult for central banks to sell investors their monetary tightening without causing volatility. I admit, I basically said the same thing at the beginning of 2017.
And bitcoin? At the moment of writing bitcoin is worth USD 14,500. A full USD 13,000 higher than the price of bitcoin in May. Total return equals an incredible 13,500% for the year. Can this continue? I really don’t know. If anything, 2017 shows that tulip- or internet-like price moves can happen again.
I wish you all a happy and prosperous 2018!