January 30, 2018 Letter to Clients

Happy New Year 2018! I hope this first letter of the new year finds you and your family in good cheer and excellent health. Looking back on top news headlines of 2017, this past year certainly seemed to have an abundance that were shocking and disheartening. However, that said, I found many stories to be uplifting and once again showed our perseverance and good will as a country to come together during crises. As a financial advisor, I am pleased to say that the markets were one of those optimistic headlines throughout the year.

2018: The sequel to 2017?

When looking ahead to 2018 in comparison to 2017 market performance, an analogy to movie sequels comes to mind. How many times have you been excited to see a movie’s sequel only to be left feeling as though it didn’t quite live up to the original? The sequel was good, just not as good.

I think the same can be said for what is to come when comparing 2018 to 2017. Like trying to create a sequel to a record-breaking box office movie hit, 2017’s returns are going to be difficult to replicate. Just as most sequels leave the viewer entertained enough to feel satisfied with the movie, the financial markets in 2018 should deliver a year of solid returns and leave investors with that same feeling.

Last year was a record-making year as every month saw a positive return – the first time ever for the S&P 500. This was supported by a combination of factors including: positive investor sentiment, improving earnings, low volatility, a favorable regulatory environment, share buy-backs, low interest rates, the global nature of the economic expansion, a falling dollar that helped US price-competitiveness, and the passage of recent tax cuts for individuals and corporations.

The returns from stock markets far exceeded those from bonds and other asset classes for the fourth quarter, as well as for the full year. These returns have lead some investors to question if shifting away from their current allocation to capture more of the upswing that equities were offering would be a wise decision. The short answer I have offered to most investors is no. The reason for that response is that it is very important to remember that clients of our firm are in well-thought-out diversified portfolios that are designed to stay true to the investor’s risk tolerance and short- and long-term needs. While it is human nature to want to reap the greatest rewards possible from a market that is delivering such significant returns, it is important to remember that the allocation of portfolios are determined in such a way to capture much of that upside while not losing sight of potential volatility that can come in the form of geopolitical risk, for example. Tensions with North Korea or faster than expected policy tightening can impact the market significantly, therefore incorporating fixed income and hedging strategies are just as important as capturing gains.

Looking ahead to 2018, there are a number of key factors that will help shape the markets:

• While the Fed may be patient in the timing of raising rates, there are three projected rate hikes likely this year. With inflation below the Fed’s 2% target in 2017, it is expected to drift only modestly higher in 2018. This should allow the Fed to tighten monetary policy gradually.

• Fiscal policy should spur growth. The newly-passed US tax bill will have a greater impact on corporate profits than overall economic growth. While domestic companies will benefit from cuts in corporate taxes, the current tax legislation provides a fragile foundation for companies to use for long-term strategy and the uptick in consumer spending will be more modest.

• Unemployment continues to fall. Solid growth domestic product growth in 2017 and 2018 should cut the unemployment rate further. While wages have been slow to react to a tight labor market so far, extra pressure to find workers spurred by tax cuts could boost wage growth in 2018.

• Stocks may experience a bumpier ride this year than in last. Nevertheless, there are a number of reasons to believe stocks will continue to rise: positive investor sentiment on the heels of 2017, the global breadth of the current economic expansion, continued earnings growth that is likely to be supplemented with lower corporate tax expense, increased consumer demand, a possible infrastructure bill, the potential for future share buybacks, special dividends and corporate acquisitions to the extent US companies choose to repatriate any of their offshore money.

A New Year Brings Forth New Opportunities

At LePage Financial Group, we see the start of a new year to be the perfect opportunity to think back on the previous year to reflect on when and where we experienced success for our clients and our growth as a firm. Equally important, we reflect on areas that we will strive to improve and build upon to enhance your experience as a client and set goals in motion to accomplish them. We are excited to be collaborating on new projects designed at enhancing our services in the future. This year will also continue to find our firm being actively involved in our communities, something that is meaningful to each one of us.

If this new year will find you experiencing a significant life change, we strongly encourage you to contact our office to keep us informed. Doing so will allow us to evaluate and discuss with you how the change could impact your financial plan and, if need be, implement changes to your plan in order to continue to meet your financial needs and goals as they evolve.

Conclusion

With impressive equity returns last year it can be easy to enter the new year with the same or even higher expectations. I caution investors against that, with a reminder that a market correction is healthy and presents buying opportunities to further enhance portfolios. I do continue my belief, however, that a portfolio that is slightly overweight in equities with a mix of fixed income holdings will behave like a movie sequel, it will be good but perhaps not as good as last year. All in all I am pleased to say that we can remain optimistic as we enter 2018.

Best Regards,

Steve LePage