Is it better to travel than to arrive? The US share market has done well this year. It has been in fitful anticipation of tax cuts to come. As the old year draws to a close the tax cuts have as we expected taken legislative form. The US growth rate has risen, exceeding 3% as the administration forecast. Will there be more to come in 2018? We think there can be. Earnings are still rising overall, and the tax cuts when they arrive will boost net earnings. The extra cash companies retain will be available to buy back shares, boost dividends or invest in future growth.
2017 was a good year for most share investors. As we hoped this time last year the world has enjoyed a synchronised economic recovery. Companies have been able to grow their turnovers, expand their profits and pay more in dividends. It is true some of the old model businesses have struggled with new competition. The digital giants of the internet age have swept much aside as they have rushed to deliver more service and capture more time from their fans. Nasdaq has done well, with Facebook, Amazon, Apple, Google and the others becoming household words and the toast of investors.
“the world has enjoyed a synchronised economic recovery”
Asia too as we suggested has had a good run. In China Alibaba and Ten Cent have done for their market what the US digital pacesetters have done for the west. There have been good stories to tell in a variety of smaller Asian markets and economies. Mr Modi in India has accelerated his pace of reform and change, as the Indian economy has continued to grow strongly.
Throughout the year it has been a worried bull market. Many savers and market professionals have looked for crises, disasters and things that would arrest the upward progress. They have worried about Korea and about Chinese debt, about political threats to the Euro and some of the words of Donald Trump. Despite all this optimism has shone through and the numbers have continued to please as the recovery stays on track.
Equity volatility, a measure of how much shares go up and down, has been low reflecting the absence of many selling days. Markets have survived three increases in interest rates in the US, with bonds not too badly affected despite their low yields. The European Central Bank and the Bank of Japan have persevered with major buying programmes of bonds, creating new Euro and yen to make the purchases.
Next year could see more of the same. It is true there will be no more official bond buying in the US, and the UK will probably not resort again to Quantitative Easing (QE). Japan will continue to expand its money base and buy its own bonds, whilst the deceleration of a similar programme in the Eurozone will be measured. Cash and credit worldwide will be boosted by these two central banks, and by the natural process of credit expansion through commercial banks in most parts of the world.
All this looks like a favourable background for share investing despite the recent gains in markets. Some will go on worrying about an early recession, a banking crash somewhere or unseen crises to come. We think these worries are likely to be overdone, given the still relatively benign economic outlook.
The above article was first published by Charles Stanley on 22nd December 2017