Most of the world’s equity markets reached or neared all-time highs in 2017, as investors set aside concerns about politics and focused on the broadening global expansion. But many questions remained: Would markets continue climbing in 2018, or are we due for a correction? Is the U.S. priced for perfection? Have investors missed the rally in Europe and the developing world? Will rising rates derail the markets?
The unpredictable investment climate left no shortage of topics to discuss as investors looked to optimize their portfolios. Here’s a look back at five of our most-read articles for 2017.
U.S. stock market valuations have climbed steadily in recent years and have approached levels not seen in nearly a decade. These elevated levels have raised concerns over whether U.S. stocks can live up to their valuations. Equity portfolio manager Greg Johnson suggested U.S. equity markets may be priced for perfection, but was cautious, noting that volatility has been low and earnings quality has arguably not been the best.
Johnson also notes that with market levels at record highs, the positioning in the multi-asset American Balanced Fund, where he is one of the portfolio managers, has become less equity-heavy. This shift in positioning reflects some portfolio managers’ preference for greater capital preservation potential should there be a down market.
The Federal Reserve took another step towards monetary policy normalization in September after announcing that it would begin reducing its balance sheet. This decision was widely expected but still prompted the question of how investing would be affected. “[S]ignificant losses can be avoided by most fixed income investors, particularly those who rely on managed bond funds that can benefit from reinvesting in higher yielding securities, as well as from duration management,” noted fixed income investment analyst Timothy Ng.
With the Fed reducing the size of its balance sheet, there is uncertainty about whether rates will be driven higher or lower. Ng outlines factors that could both raise and lower yields as the Fed unwinds its balance sheet.
One of the most common questions investors ask their financial advisors is “when can I retire?” For some, this conversation comes as an investor approaches 55 years of age or older, but what if a younger, high-net-worth investor poses the question? At Capital Group, we set out to provide some factors to consider should a younger investor want to retire early. One key factor? Perception versus reality.
Many retirement plans don’t take into account a scenario of “extreme early retirement” where income and capital appreciation may be needed for upwards of four decades (or more). The lengthy amount of time where withdrawals are occurring from a retirement plan may force some investors to rethink how much they need invested to retire. Our analysis suggests an investor retiring at age 40 would need a multiple of approximately 36 times annual spending to ensure that he or she does not run out of retirement funds later in life. Investors should consider several more factors, including expected investment returns and unexpected spending shocks, no matter what age they aim to retire.
The run-up in global equity markets in 2017 was heavily supported by stocks in the technology sector. In the MSCI All Country World Index, information technology stocks returned more than 40% year-to-date through 12/11, outpacing returns in the second-highest returning equity sector by more than 15%. The strong returns prompted questions of whether this run in the tech sector was sustainable and if tech stocks were on the same path as they were during the bubble of the late 1990s and early 2000s.
Equity portfolio managers Jody Jonsson and Larry Solomon, along with investment analysts Irfan Furniturewala and Will Craig, outlined how the ongoing boom in tech stocks differs from the tech bubble. One of the largest differences is that technology companies’ share of the S&P 500 market cap is more closely aligned with their share of profits. Cash-heavy balance sheets, less robust valuations and a winner-take-all mentality were also highlighted as evidence of a boom, not a bubble in tech stocks.
Finally, one of the biggest stories of 2017 was the booming interest in blockchain technology, and in particular, crypto currency bitcoin. The interest reached a fever pitch in recent months, with bitcoin experiencing large gains. In June, Capital Group emerging-technology lead Ninou Sarwono and investment analyst James Bray offered their thoughts on blockchain, including the many use cases for the technology and how it could revolutionize industries. While blockchain is rapidly growing in popularity, barriers persist. The rate at which the technology is adopted moving forward will be partly determined by how quickly it’s embraced by financial intermediaries.
For additional insights, including what investors might expect in 2018, check out our 2018 Outlook.
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