It’s been said, allegedly by a great Yankee catcher, that “It’s tough to make predictions, especially about the future.” We’ve no clue whether #8 said it or not, but whoever did was on to something, at least with regard to stocks and bonds. Fact is, it’s impossible to divine which direction the financial markets will move over anything close to the long term. Yet folks are paid lots of money to pretend they can.

“This is going to be the final bubble…and without a doubt it will be the worst stock market crash you will see in your lifetime and it is going to happen by roughly end of 2017.”

Legendary economist Harry Dent, April 2016

Here’s what we say: Who pays these guys? Truth be known, the track record of the high-profile pundit class is awful. Beyond awful. In fact, it’s downright embarrassing. These guys don’t just miss by degree, they miss by direction. Which raises two questions: Why are they so lousy? And, more importantly, why do we keep buying the snake oil they’re peddling?

“It really does now look like President Donald J. Trump, and markets are plunging. When might we expect them to recover…a first-pass answer is never.”

Legendary advisor Paul Krugman, November 2016

To the first question, the answer’s easy: It’s absurd to think you can predict the mood investors will be in next week, much less 12 months from now. And mood is everything. No matter what gets measured today, the calculation can be ignored in a year, or a month, even an hour, from now.

“Some stocks in America are turning into a bubble, the bubble is going to come, and then it’s going to collapse. You should be very worried.”

Legendary investor Jim Rogers, May 2017

To the more interesting question – why does anyone care what these gurus think anyhow? – the answer, too, is straightforward. It’s because we all want to think the markets are precise and foreseeable. Indeed, there’s a natural desire among us to believe there are gifted seers out there who can read the data, crunch the numbers, and tell us exactly where the S&P 500 will be on Dec. 31.

“I think a realistic scenario is that asset holders will lose 50% of their assets. Some people will lose everything.”

Legendary forecaster Marc Faber, June 2017

Market prognosticators, in other words, have an almost permanent audience. Which is why those of the charlatan sort are willing to make bold and sometimes ridiculous prognostications – they’ve got nothing to lose, and, who knows, maybe they’ll get lucky and be right. In the end, though, the only thing that’s truly knowable is that no one knows when.

What the equity markets have been doing…

INDEX Friday’s Close Two-Week Point Change Year-to-Date Change
DJIA 24,719.22 +487.63 +25.08%
S&P 500 2,673.61 +31.39 +19.42%
NASDAQ 2,673.61 +55.80 +28.24%
Russell 2000 1,536.96 +12.42 +13.40%

 

What the fixed income markets have been doing…

FIXED INCOME Period Change YTD 12 Months Yield
U.S. Treasuries
NC
2.5% 3.4% 2.4%
U.S. Investment Grade -(0.1)% 6.5% 7.9% 3.2%
U.S. High Yield NC 7.3% 7.9% 5.7%
U.S. Municipals NC 5.3% 6.3% 2.3%
Non-U.S. Developed NC 9.6% 11.6% 0.7%

 

What Fund Architects has been doing…

Few would argue that 2017 was an interesting year from an investment perspective. Who would have guessed back in January that the stock prices would increase every month for the first time in history? And who wasn’t surprised by how low volatility dropped during the year. Overall, the Fund Architect Portfolios benefited from strong returns among non-U.S. equities, especially in emerging markets. Solid returns among other risk assets, such as fixed income credit sectors, also provided a boost.

January Portfolio Changes

Here’s how we plan to start 2018.

Equity Rankings

We maintain our overweight to the Global Consumer Discretionary sector. This position has experienced strong returns and low volatility in the short run, which leaves it at the top of our ranking score. We will be trading our U.S. Large Cap equity overweight in favor of U.S. Mid Cap stocks.

Fixed Income Rankings

With most bond markets fairly quiet across 2017, we maintained our overweight to convertible bonds from February through December. To start 2018, our system is identifying strength in intermediate term U.S. Treasuries and Preferred Stocks.

Our Thoughts

For any number of reasons, not least of which the recently passed tax reform bill, investor sentiment appears to be shifting from skepticism to optimism. As long as economic growth and earnings are relatively good, the markets should be fine. Still, it’s reasonable to expect more mediocre returns than 2017.

While equity valuations are clearly rising, our work indicates overall fundamentals remain strong.

What the pundits have been saying…

“The prospect of fiscal stimulus thus reinforces our forecast that the funds rate will rise well beyond current market pricing, with four hikes in 2018 and a terminal rate of 3¼%-3½%.”

  • Goldman Sachs

What the numbers are saying…

  • $300,000

The potential value of Philip Neumeier’s 15 bitcoins he bought for $260 in 2013. The only problem: He can’t remember his password. Mr. Neumeier is one of many who bought into the cryptocurrency years ago and can’t remember the complex security codes needed to get to their bitcoins.

What people have been saying…

“We’re Going to Beat Elon Musk to Mars.”

  • Dennis Muilenburg, CEO, Boeing

“Do it.”

  • Elon Musk, CEO, SpaceX

The views in this commentary are those of Fund Architects. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Fund Architects or any other investment professional.  The information contained within this commentary should not be the sole determining factor for making investment decisions. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Fund Architects. Information pertaining to Fund Architects advisory operations, services, and fees is set forth in Fund Architect current disclosure statement, a copy of which is available upon request. Fund Architects, LLC is an SEC Registered Investment Advisory Firm.

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