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2017: The Year in Charts

These are the charts and themes that tell the story of 2017…

I. The Year Volatility Died

There’s an old saying that goes something like this: “the market has a tendency to move in a fashion that inflicts the most pain on the most participants.”

After the election in November 2016, the most prominent market prediction was for higher volatility in markets…

market volatility

After a quiet start to 2017, the call remained in force…

2017 is shaping up as a volatile year for markets

And so naturally, the market did what it does best: inflict the most pain on the most participants.

The S&P 500 would sport an annualized volatility of 3.9% in 2017, the lowest on record (monthly data going back to 1928). Not to be outdone, the bond market’s volatility of 1.5% was also the lowest on record (monthly data for the Bloomberg Barclays Aggregate going back to 1976).

Rolling 12 month volatility from Jan 1977 to Dec 2017 graph3

What about intraday volatility? You guessed it: the lowest on record, with 95% of trading days in the Dow showing a range (high to low) of less than 1%.

Intraday range chart 1930 to 2017 year4

From August 18th to November 29th, the Dow would go 72 straight trading days without an intraday move greater than 1%, by far the longest stretch in history.

Consecutive trading days without an Intraday Move 1930 to 2017 graph

II. Records Are Made to Be Broken

Low volatility records were not the only one’s broken in 2017…

  • We saw the first perfect 12-0 year, with the S&P 500 up every single month.

S&P 500 Index: Highest number of up months in 1928 to 2017 chart

  • The S&P has now risen for 14 consecutive months, the longest run in history.

S&P 500: Longest Monthly up streaks in 1928 to 2017 chart

  • This record advance came without any meaningful pullbacks, as the S&P 500 has been within 3% of an all-time high for a record 289 trading days and counting.

S&P 500: Longest streaks with All time high in 1928 to 2017 chart8

  • The Dow would close at an all-time high 71 times during the year, the most in history.

Dow Jones Industrial Average chart9

III. The World is Flattening

While stocks were hitting all-time highs, the bond market was ever-so-slowly moving towards normalization. With the Federal Reserve hiking rates 3 more times (75 bps in total) during 2017, short-term yields were on the rise, and 1-month through 3-year yields hit their highest levels since 2008.

Federal Reserve short term yields graph10

At the same time, longer-term yields (10-year and 30-year) actually fell during 2017.

US longer term yields chart11

The result: a sharp flattening in the yield curve throughout the year. At 0.51%, the spread between 10-year and 2-year yields on the last day of trading was the flattest level of the expansion.

sharp flattening in the yield curve graph12

IV. Still Easy After All These Years

The flattening yield curve was a conundrum of sorts for market participants, who were hearing daily reports of better economic data and an explosion in growth to come.

Indeed, during 2017, we saw a number of economic data points hit their best levels in years…

  • Unemployment Rate (4.1%): Lowest since 2000.

US Unemployment rate graph13

  • Jobless Claims: Lowest since 1973.

US Jobless claims graph14

  • Consumer Confidence: Highest since 2004.

Consumer Confidence graph15

  • ISM Manufacturing Index: Highest since 2004.

ISM Manufacturing Index graph16

  • Non-Farm Payrolls: Up 86 consecutive months, the longest streak in history.

Non farm payrolls and longest positive streaks chart17

In spite of this backdrop, the Fed only hiked rates 3 times in 2017, to a year-end range of 1.25 to 1.50%. After subtracting inflation (core CPI of 1.7%), this leaves the real Effective Fed Funds Rate in negative territory for the 9th year in a row.

Effective Fed Fund Rate minus core graph18

This is by far the longest period of easy money in history. The previous longest streak of easy money ended in December 2004 at 39 months with a negative real Fed Funds rate. That policy was widely considered one of the primary causes of the housing bubble. Entering 2018, we are 115 months and counting.

It should come as no surprise, then, to see U.S. housing prices once again surging higher, outpacing gains in income (and reported inflation) over the past five years by a wide margin.

S&P Case Shiller National Home Price Index graphs19

It should also come as no surprise to see U.S. equity valuations (CAPE ratio, Shiller P/E) end the year in the 97th percentile, above all periods with the exception of September 1929, June 1997 through February 2001, and May through June 2001.

CAPE ratio, Shiller graph20

Data Source: Robert J. Shiller, 1860-2017

This asset price inflation was precisely what the Fed was hoping for in maintaining extremely easy monetary policies far longer than necessary. According to their “wealth effect” hypothesis, such inflation was going to lead to higher consumer spending and lending, and higher economic growth. With the slowest growth expansion in history (2.3% real GDP), the growth portion of their theory remains to be seen, but there is no denying the ongoing boom in asset prices.

The Fed is not alone in this pursuit, as evidenced by every developed country central bank in the world maintaining negative real interest rates in the 8th year of a global expansion.

Global Central Bank Policy Rates chart21

V. A Good Old-Fashioned Mania

This is a good segue into one of the unexpected byproducts of easy money and currency debasement: the inexorable rise of cryptocurrencies.

2017 will forever be known as the year Bitcoin went mainstream, with a mania that rivals all others…

Bitcoin graphs22

Bitcoin entered the year below $1,000 and by December 7, it had crossed above $19,000.

Bitcoin Milestones chart23

At its peak on December 7, Bitcoin’s market cap was higher than 98% of the companies in the S&P 500, including Bank of America, Wal-Mart, Visa, AT&T, Citigroup, and Coca-Cola.

Largest companies by market cap chart24

Bitcoin would end the year above $13,000, up over 1,300%. At the end of 2010, it was at 30 cents.

Bitcoin returns chart25

The top 20 cryptocurrencies ended 2017 with a combined market value of $494.9 billion, a 2,891% increase from the $17.1 billion combined value on January 1.

Cryptocurrency market capitalisation chart26

At the start of 2017, Bitcoin was the only cryptocurrency worth more than $1 billion. At the start of 2018, there are 35.

Cyptocurrency from Jan 2017 to Jan 2018 chart27

VI. King Dollar Dethroned

While cyptocurrencies were soaring higher, the U.S. Dollar Index was moving sharply lower. With a decline of over 10%, this was the worst year for the index since 2003.

US Dollar Index Returns from 2008 to 2017 chart28

Every major currency in the world finished the year higher against the dollar.

Currency ETFs chart29

As the dollar fell, most commodities moved higher. After 5 straight years of losses (from 2011 – 2015), the Bloomberg Commodity Index finished up for the 2nd straight year.

2017 returns of Commodities chart30

Crude Oil ended the year above $60, its highest level since mid-2015. From its low of $26 in February 2016, it is up over 130%. The crash in Crude from 2014-2016 allowed central banks to pursue extreme monetary policies (negative interest rates) under the guise of deflation. Now that Crude is on the rise again, one wonders if we will begin to see a reversal of such policies in 2018, most notably from the ECB.

Crash in Crude oil from 2014-2016 graph31

In another sign of global reflation, Copper would gain over 30% during 2017, ending the year at its highest level since 2014.

Copper spot price in global deflation graph32

Lumber prices would rise 40% during the year, hitting a 21-year high, reflecting a surge in activity in the housing market (U.S. new home sales at highest levels since 2007).

Lumber price graph33

The weaker dollar would prove to be an additional boon for international equity investments. Every major country ETF in the world ended positive in 2017 with an average return of 29%.

Total returns in country ETFs chart33

VII. Wrapping Up: 1991-99 Redux?

We closed out 2017 with the 9th consecutive positive year for the S&P 500, tying the record run from 1991-99.

Longest consecutive positive calendar year streaks chart35

The S&P has now been positive in 14 out of the last 15 years, a fact that would probably surprise a lot of people.

S&P 500: total returns of 1928 to 2017 chart36

9 out of 10 sector ETFs finished positive with Technology (+34%) leading the charge. 9 out 10 sectors also hit all-time highs during the year, with only Energy failing to do so.

Sector ETFs of S&P 500 chart37

Meanwhile, the U.S. economic expansion is now the 3rd longest in history (at 102 months). If growth continues through the middle of 2018, it will be the 2nd longest expansion, trailing only the 10-year run from 1991-2001.

Annualized Real GDP graph38

All of this good news was not lost on investors, with certain sentiment measures showing the most bullish outlook in the past 30 years. The wall of worry that persisted for much of the past 9 years has finally been torn down.

Investors Intelligence Sentiment Graph39

Will the S&P 500 break the 1991-99 record and go up for 10 straight years?

Will the U.S. expansion break the 1991-01 record and go on for 11 years?

Most investors today would probably answer yes to both questions, and while they may be proven wrong (the bull market/expansion could end at any time), they could also be proven right. Just because something hasn’t happened before (10 straight up years, 11-year expansion) doesn’t mean it can’t happen in the future. We learned this lesson many times in 2017, as there is no impossible in markets.

If you don’t believe that take a look at the following chart showing Greek bond yields now trading below U.S. yields. Who could have or would have predicted that a few years back?

Greece vs US 2 year yield graph41

VIII. Happy New Year

These were the charts and themes that told the story of 2017. As always, the narratives followed price.

As prices change in 2018, the narratives will change as well.

Where will the S&P 500 end 2018? Where is Crude headed? Is Gold a good investment here? How many times will the Fed hike rates?

I don’t know the answer to any of these questions. As Lao Tzu said, “those who have knowledge don’t predict. Those who do predict don’t have knowledge.”

3 most important words in Investing

What’s the alternative? Weigh the evidence as it comes, invest based on probabilities, be forever humble and thankful, and leave the predictions to those whose job it is to entertain. That’s the best you can do in this business.

In 2018, I predict one thing and one thing only: you will see many more surprises. That is the nature of markets.

Thank you for your readership this year. I hope in some small way you found the information in this blog useful to your journey as an investor.

I wish you all a happy, healthy, prosperous and fulfilling 2018.

***

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To follow these charts and themes on a more frequent basis in 2017, you can follow my feeds on twitter and stocktwits.

Related Posts:

2016: The Year in Charts

2015: The Year in Charts

2014: The Year in Charts

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO, CMT

Charlie-Bilello

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. Charlie holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and also holds the Certified Public Accountant (CPA) certificate.

In 2017, Charlie was named the StockTwits Person of the Year. He is a frequent contributor to Yahoo Finance and has been interviewed on CNBC, Bloomberg, and Fox Business.

You can follow Charlie on twitter here.

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