2018 Outlook

I’ve been meaning to post an outlook for 2018, but I kept putting it off.  Between the holidays, a sick kid, and my belief that calendar year outlooks are dumb, procrastination has been beating my will to write.  No more!  Here are my predictions for 2018:

• If you have been investing for 10+ years, your 10 year return number is going to look a ton better at the end of 2018
• Donald Trump is going to collaborate with Democrats going into the mid-term elections
• Bitcoin and crypto-assets will rally hard, then have a huge correction at year-end

To be honest, those second two predictions are garbage.  The first one, however, is the stealth story of the year.

Ten Year Returns

If you’ve been investing for over ten years, your ten year return number is going to burst higher.  Why?  The S&P 500 lost 37% in 2008 and that year is going to fall off of the 10 year return at the end of the year.  At the end of 2017, the S&P 500’s 10 year return was 8.5%.  This is slightly lower than the historic average of 9-10% (depending on what source you’re looking at), but remember that includes an historic 37% loss in 2008 and two years of low single-digit returns (2.1% in 2011 and 1.4% in 2015).  With 2008 falling off the 10 year return stream, even if 2018 returns a flat 0.0%, the 10 year return for the S&P 500 would be 13.6%!!!

As the year comes to a close, people are going to look at these numbers and pat themselves on the back.  Don’t fall for it.  There’s no skill in letting the math play out.  The real value is added by sticking with a financial plan and having the guts to rebalance into the teeth of a Kodiak Bear year like 2008.

Likewise, don’t be too sure of the predictions of middling stock market returns going forward.  The folks predicting this are correct that valuations look goofy right now, but we had a generational drop in the stock market less than a decade ago and things are going ok.  Are these folks saying we’ll have a huge drop or just an extended period of low returns?  Tough to see that happening with all the disruptive innovation going on today.  Medical breakthoughs are happening daily.  Augmented reality and machine learning are adding a new dimension to our lives.  Fleets of autonomous cars are a thing that might actually happen in that time frame.  Of course there’s blockchain (see my garbage prediction below!) and that Elon Musk guy is dragging us kicking and screaming into the future, too.  While I hesitate to predict market returns going forward, over the long-term I believe that anyone betting against human ingenuity is going to get spanked.

Now, on to my garbage predictions!

Trump works with the Dems

Your non-financial markets (hopefully) prediction: Trump works with the Democrats going into the mid-term elections, confusing everyone, and actually staunches Republican bleeding.  We’ve seen this before.  If the Republicans don’t figure things out for whatever shiny object the Donald is focused on at the moment, he has no problem seeking input from the other side of the aisle.  This upsets the folks with a vested interest in the tribalism of politics, but it’s pretty cool to see someone focused on results.

Republicans are on a roll right now after passing tax legislation and busting the government shutdown.  They will over-reach when it comes time to seriously discuss the budget and the debt ceiling, refusing to negotiate in good faith.  Trump has never shied away from debt so he may actually be a natural ally for the Dems.  This will throw everything into disarray, including ad campaigns for mid-terms.  Will Democrats campaign against the President if he’s actively working with them?  The mental gymnastics will be glorious to behold and there should be enough confusion that Republicans hold on to more seats than expected in the House.

The market will continue to ignore the absurdity in DC, paying more attention to earnings and how companies position themselves for the tax legislation.

Bitcoin

This is the obligatory commentary on bitcoin.  I’ll spare you the stock photo of the coin with the B and the circuits on it.  Bitcoin is (for now) the reserve cryptocurrency, the universal trading partner.  If you want to buy an obscure alt-coin, you probably have to buy it with bitcoin.  With all the talk of the demise of crypto, people forget that the code is not written in stone.  There are campaigns to make bitcoin faster and lower transaction costs.  These have ripple (pun intended) effects such as possibly upping the requirements to run a node which would potentially lower the number of nodes, reducing decentralization.  This would put more voting power into fewer hands and increase vulnerability to attack.  That being said, bitcoin’s problems are all solvable and it has an advantage by being the incumbent currency.  Ethereum is geared more for implementing applications than for use as a store of value while Ripple (or the XRP token) is focused more on institutions than retail.  Let’s not declare bitcoin dead yet.

I agree with the notion that the more time that passes without crypto dying, the stronger its case.  The media can’t dive down into the actual use cases for these things because viewers want the 10 second soundbyte: was it up or down today?  The truth is that there is a huge amount of technical development going on (at least for the legit projects) meaning that just because something doesn’t look like it’s ‘worth’ $x today doesn’t mean that it won’t be tomorrow.  Ripple is a great example.  It was tough to justify its price until real companies started using its products (including the XRP token).  In 2018, we’ll see more and more stories about crypto-assets being useful in the real world, setting off a hype train and another round of speculation.  By the end of the year or early 2019, I wouldn’t be surprised to see another blow-off like we had recently (and each January since 2015) and more beanie baby hot takes.

Lastly, an observation on crypto – It was fascinating to watch the narrative on this space over the last two months.  Through the month of December, it was constant talk about tulip bulbs and when the crypto bubble would burst.  In January, it has been delight and a declaration of victory – crypto is dead, the bubble is burst.  I find it odd.  Instead of communicating knowledge of the crypto arena, this is actually a signal of willful ignorance.  People who bought at the very top are disappointed, yes.  However, people who bought as late as early December are likely sitting on enormous gains unless they cashed out at even bigger gains.  Just weird to consider the bitcoin bubble popped when it’s up 800% (or whatever) over the last year.

The Weather

A calendar year outlook is kind of like a weather report.  It can tell you about what recently happened and project a current weather pattern into the future, but you don’t make long-term decisions around it.

If you prefer a sailing metaphor:  I expect smooth sailing for 2018 for those who are invested with a destination in mind and a financial plan in hand.  For those looking to navigate by looking directly under their ship, they will find themselves running aground regardless of fair or foul weather.