Themes from 2017

2017 is coming to an end.  Stock markets around the globe are having above average years in terms of return.  Record highs in the US stock markets are occurring every week.  Corporate profits are near all-time highs and Congress just passed a bill that will lower corporate tax rates.  We could see new all-time highs in corporate profits as companies pay less in taxes.  What they do with the increase in net income is any ones guess.   It is important to point out that not all companies will benefit from the new rate because they had low effective tax rates pre-cut.

Tax Reform dominated the talks on Wall Street for the last few months but I wanted to highlight other themes that have played out this year and will continue into next year.

  • Global synchronized growth
  • Low Volatility
  • ETF Fee Wars

1 – Global Synchronized Growth

My favorite slide that sums up the theme of global synchronized growth is below.  The slide shows that we are not the only country that is seeing their economy expand this year.

Created by JP Morgan Asset Management, the Global Purchasing Managers’ Index for Manufacturing slide illustrates the global synchronized growth.   A number at or above 50 means manufacturing is accelerating and a number below 50 means it is contracting.   At the end of September, every major Developed and Emerging Market country was above 50.  You can see that Global PMIs are around the highest they have been going back to October 2015.

global pmi 4q

Source: JP Morgan Guide to the Markets comes out quarterly.  It is a great guide for all things economic, markets, etc.

2 – Shorting Volatility was the best trade this year 

Forget about the 30% plus return in Emerging Markets or the 22% rise in the S&P 500 Index, the clear winner this year was “shorting volatility.  Shorting volatility, what is that?  Shorting volatility means (in a simple form) that you are betting that there will be less volatility in the short run (1-30 days).  I am not endorsing this fund and it is extremely risky.  We do not own in our client portfolios.

Take a look at the chart for the VelocityShares Daily Inverse VIX ST ETN, ticker XIV.

XIV_chart (1)

The ETN is up 192% through December 22, 2017.  Wow!  How did this happen?  Trump was supposed to make the world turn upside down.  In reality, volatility has been silent the entire year.  There has been no pullback greater than 3.0%.

I find this theme fascinating because it was almost certain that the Trump presidency would bring a huge selloff the stock market and that volatility would spike.  The total opposite happened as 2017 was one of the lowest volatility years on record.  We will be talking about low volatility until we see a pickup in price action.  If volatility rises, you will see a lot of pundits on TV clamoring about how you should have taken advantage of low vol and bought protection (buying puts).

3 – ETF Fee Wars

You may have heard about the Amazon effect but the Vanguard effect is just a breathtaking.  Asset managers, like State Street, have been dropping their fees to compete with Vanguard and Blackrock.  State Street announced new pricing for some of their ETFs in a press release back in October.  These changes allow new money to possibly come into State Street instead of Vanguard.  How low are we going to go?  Some people are predicting that we could see a negative expense ratio because ETFs with large AUMs can make money by lending out their securities and are paid a vig or interest to do so.
fee wars

This theme will continue to play out in the year’s ahead;  however, the impact on lowering fees from here will be less and less because ETF investors are already paying low expense ratios.   Expensive equity mutual funds are “on the ropes” as most have underperformed their stated benchmark (mostly due to higher fees) and are seeing significant outflows.