The Market Year That Was, and the Year That's Coming

In this segment from this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp help us flip over the calendar from a 2017 in which the U.S. stock market was pushed steadily ever higher. They lay out the five best-performing S&P 500 stocks, as well as some of the biggest losers, consider our economic conditions, and take a swing at the elephantine question in the room: How long can this expansion really last?

A full transcript follows the video.

This video was recorded on Jan. 9, 2018.

Alison Southwick: Normally this is the point in the show where I would say, "It's time for Answers, Answers!" But, not anymore. Well, we're changing things up in 2018. Instead of kicking off the show with listener questions, we're going to talk about breaking news, or something else interesting that we learned this week. Don't worry! We'll still answer your questions. It's just that we're going to do it once a month in a Mailbag episode. Any objections out there? No?

Robert Brokamp: Chirp, chirp, chirp.

Southwick: OK! So, we don't have a name for this segment. Feel free to send us your ideas because naming things is hard. Bro, what do you want to talk about this week?

Brokamp: I figured since we just concluded 2017 and we're kicking off 2018, I'll talk a little bit about the year that was and what I've read about when it comes to what people expect for 2018.

2017 was a great year to be an investor. The S&P 500 was up 22%. Not only is that more than twice the historical average, it made history because it was the first year, ever, that the S&P 500 made money each and every month. There were a handful of years, previously, where it made money in 11 months, but this is the first time it made it each and every month. A great year -- an easy year -- to be an investor.

As for other types of investments, small caps didn't do quite as well. They earned about 16%. That's still pretty good.

Southwick: Not so bad!

Brokamp: International stocks, as a group, though, did even better. They did 27%, and if you look at emerging markets they earned well above 30%. Diversifying internationally definitely paid off this year.

When you look at the bond market, of course bonds don't do as well, but the overall bond market made 3.5%, which I think is pretty good given that our expectations for bonds are low. As I've said before, I think you could expect maybe 1.0-1.5% above cash. They definitely did that. And interest rates did go up -- especially on the shorter range -- shorter term bonds. To make 3.5% on bonds in a year where interest rates go up I think is pretty good.

Southwick: I feel like ever since we started this show, you've been saying, "Of course, the market goes up, on average, about 10%," but for the next few years I think you need to expect more conservative results.

Brokamp: Right.

Southwick: Not this year!

Brokamp: Not this year! And I'll talk about it a little later. What I like to do at the beginning of every year is look at people's predictions and expectations for stocks, bonds, as well as just general economic stuff. Nobody expected [this], but I read a year ago 22%.

Southwick: I'm not personally attacking you.

Brokamp: No, no, no, that's fine. It's OK. In case you're curious, these were the best-performing five stocks in the S&P 500. The best performer was NRG Energy [NRG]. That's the name of the company. It earned 132%. Then followed by Align Technology [ALGN], Vertex Pharmaceuticals [VRTX], Wynn Resorts [WYNN], and Boeing [BA], which made 89% last year.

Despite the fact it was a good year, 28 stocks in the S&P 500 lost more than 20% led by Range Resources [RRC] losing 50%. Under Armour [UAA]. I know that's tough for a lot of Motley Fool investors...

Southwick: Yes, Motley Fool investors have that.

Brokamp: ... followed by Scana [SCG], Envision Healthcare [EVHC], and GE lost 45% last year. It just goes to show that even in a great year for overall investing, you're probably going to have some stocks or other types of investments that didn't do quite as well as the overall market.

The other thing about last year, besides the fact that we made money each and every month, is we're now on the second-longest streak of not having a 5% drop. The last time there was a 5% drop in the market was back in June of 2016. The current streak is 554 days. The longest streak is 593 days, which happened in the '50s. That gives you an idea of how easy it's been to be an overall investor. A lot of people are now asking how long this can go on. It is the second-longest bull market in history.

Southwick: People have been saying that for the last 10 years. How long does this go on?

Brokamp: Exactly. One interesting thing I found, that was pointed out by the Capital Group [which runs American Funds, one of the biggest mutual fund families], is that a lot of bull markets are usually tied to some sort of economic expansion. Everyone pretty much knows that. The expansions, on average, last 60 months. This current one has lasted 100 months. People think that's a long expansion, but it's been a weaker expansion. They pointed out [with] the average expansion, the economy grows about 123%. Right now, we're only at 115%. While it's been a long bull market and a long expansion, it hasn't necessarily been the highest or fastest growing.

That's one way to say that while it's been going on for a long time, it could have room to run; and so, while looking to 2018, when I read tons of projections from various companies and experts for 2018, most people expect it to continue.

Things are looking pretty good. We all know about the new tax law, which should benefit consumers and corporations. According to Vanguard, 80% of developed countries are at full employment, meaning that the unemployment rate is very low. It's a good time to be out there looking for a job. It's a good time to be asking for a raise. In fact, that's really one of the only risks that have been highlighted by most people, and that is inflation. When you have low employment, that puts labor in the driver's seat that can ask for higher wages, which often get passed on to consumers. Inflation is one risk.

And one thing that I noticed a lot this year, that I haven't seen in many previous years, is geopolitical risks, and we all know that politics these days is a little crazier. Traditionally, what you will see economists and folks say is to ignore politics when it comes to your portfolio. This year, just about every forecast I looked at said we just don't know, so while the economy looks pretty strong and things are looking pretty good, you just don't know. It's just a wild card.

Southwick: Yes, you can expect anything or nothing.

Brokamp: You can expect just about anything, exactly.

Southwick: But you can't necessarily prepare for it. You can expect it, but there's not a lot you can do.

Brokamp: Right, and what do you do about that? The same thing you always do and that is any money you need in the next few years should be safer in cash or bonds. Otherwise, just hold on for the long term. Traditionally, on average the market drops about 10% once a year. We haven't seen that in almost two years, now, but expect that. A lot of what I read said that's normal, but because it hasn't happened in a while, people might freak out more than usual when it does happen, and you might see a little bit more panic selling. Otherwise, things are looking pretty good.