As we bid adieu to a wonderful investing year and welcome a new one, it’s time to pause and ruminate a bit. It is that time when we set our expectations. We actually need to assess how expectations played out in 2017.
Investment performance significantly outplayed our expectations in 2017. We did far better in the stock markets than in the real economy. That’s not unusual. Often, stock markets run ahead of the real economy. Now, economic performance needs to catch up with the stock markets. Can the markets keep running ahead of economic performance for two years in a row? While we can’t rule it out, it would mean that the economy will come under very severe pressure from the stock market. And, at some point in time, the stock market will lose patience and confidence.
The key factor to watch out for now is economic performance. This would be a shift from the company-focused approach that worked exceptionally well in 2017. The best thing to happen for investing will be the return of economic growth.
While the markets seemed unaffected by bad news in 2017, taking everything in its stride only to head higher, 2018 will certainly test its resilience and patience.
“The road to long-term investment success runs through risk control more than through aggressiveness.”– Howard Marks