Quite an interesting week with SPY moving to the red at the last hours of today’s trading session. The index was down 0.43% on the week, but all major indices ended the year strong with SPY up 19.5%, the Dow 25.2% and Nasdaq up 28.2%. Overall, each of the major indexes had their best one-year return since 2013 with Tech leading the way, returning over 37% this year. The question now shifts to how 2018 will play out with tax reform beginning to take effect and President Trump’s pro-business agenda continues. Valuations continue to be a concern among investors, with past bubble indicators flashing but the market has only continued its rally.

Traditional value investing has been almost wiped out, with value opportunities becoming scarcer by the day. Essentially all sectors are trading at premiums compared with historical averages, yet valuation could be corrected without price reductions. If tax reform grows earnings as expected and companies invest their new cash correctly, valuation concerns could disappear by next year.

The Trump administration will have much to do with this, as significant changes will have to be made to current regulations and the macroeconomy will have to continue to grow rapidly for valuations to be sound again. The next year will be key to the near-term future of the market, as by many measures the market is in the risk of a crash, but it is hard to deny the potential fundamental catalysts for US equities moving forward.

The S&P500 closed today at 2,675.

  • The Dow, S&P and Nasdaq were down 0.13%, 0.63% and 0.81%, respectively

  • S&P posted 36 new 52-week highs and no new lows

  • Eyes on future regulation, Fed Rate hikes and macro indicators (Consumer Confidence, Spending, New Home Sales etc.) continuing to be positive for US industrials

 

US crude ends above $60 for the first time in over 2 years backed by positive supply and demand outlooks. The commodity was the star in the second half of this year after rising from its summer low of $44. OPEC seems to be meeting production cuts well and Asian demand continues to grow. Venezuela has made its way into the news with disaster after disaster with continued production problems and Libya and the North Sea only amplified the supply reductions. Even the US got hit this year with hurricanes causing midstream disruptions in the South.

The energy sector underperformed this year, but various big players still performed well and seem well poised for a turnaround into 2018. There seems to be a trend into downstream investing (refineries, petrochems) instead of traditional upstream by the big players with Shell being the most noticeable. This will be an important topic in 2018 as oil demand seems to have peaked and oil equities look for new ways to generate income and reduce their exposure to the commodity’s volatile price swings.

Overall, oil has surpassed expectations everywhere with confidence in the commodity’s ability to end the year above $55 shrinking among major firms and research teams throughout the year, but it proved everyone wrong.

  • WTI ends the year up 12.5%, Brent up 17%
  • Spread between WTI and Brent is at highest in few years due to various supply hits to Brent (pipeline explosions or leaks in Australia, Libya and many other supply gluts throughout the year)
  • Eyes on OPEC extending and meeting production cuts in 2018, Venezuela’s continued production concerns, US shale production and Chinese demand growth

 

The precious metal had its best year since 2010 returning ~13% this year, marking its second positive year in a row. Correlations seem to be out the door, with both gold and equities having bull years but everything in the green seems to be the new norm. However, gold’s rally this year was built on a weak dollar, macropolitical risks (North Korea just keeps on giving gold some room to run) and a lack of confidence in the Trump administration. While Kim Jong-un will likely continue his charades onto 2018, there may be troubled times ahead for the metal on rising rates and the newfound confidence in Trump after his tax reform.

The last weeks have been full of mixed macro news, with unemployment claims beating expectations but Michigan’s and CB’s Consumer indicators missing estimates. With that said, the indicators are still near all-time highs and the miss has not concerned investors much. The dollar has been weak this week and throughout the whole year, one of the main reasons for gold’s rally this year. Eyes are on the dollar, housing and consumer indicators as well as political concerns moving forward into 2018.Still like gold as a hedge and safe haven asset

    • Up 13%, best year since 2010
    • Correlations no longer apparent
    • $1,300 continues to be level to watch moving forward
    • Increasing confidence in Trump’s ability to deliver on his promises may cause pressure for gold in 2018
    • Political uncertainty between North Korea, China and the US don’t seem to be slowing down
    • Mixed views for the metal moving into 2018, eyes on Trump, the Fed and NK

     

     

    2017 has proven to be the year for the emergence of Cryptocurrency into the mainstream market. Now futures contracts are available for Bitcoin and several ETF’s are looking to add Bitcoin to their offerings.

    On January 1st of 2017 Bitcoin was valued at approximately $973 per coin and is now trading around $13000 per coin, a gain of over 1200%! Similarly, other major coins have also seen this meteoric rise is value over 2017. Ethereum has risen over 8000% and Litecoin has risen of 5000% just to name a few.

    Though these numbers are quite impressive, over the last few weeks we have seen a major sell off in the Cryptocurrency markets and volatility has decreased somewhat due to the Christmas and New Years holidays. We expect volatility to return after the holiday season has concluded.

    There is a lot of speculation at this point if Bitcoin and Cryptocurrency in general is a bubble or if it will become mainstream. As more and more retailers are accepting Bitcoin as legal tender it would appear that Cryptocurrency is here to stay for now. However, we would advise caution if you are contemplating investing in Cryptocurrency at this time. As no one knows the future and everything is speculation at this point it is impossible to tell what direction the Cryptocurrency markets will go.

     

      Thank you everyone for checking out today’s market update and I wish you a prosperous year of trading to come!

      Sincerely,

      Rizwan Memon
      & The Riz International Team