The story of 2017 – an epic bull market in complacency

We’re nearing the end of another year.

I could spend the whole of today’s letter carping in a pedantic manner about how the end of the calendar year is a somewhat arbitrary point at which to take stock of your investments.

But by the end of it, I’d only hate myself, and you would too. So I won’t.

Instead, let’s just dwell on how different the end of this year feels to the end of last…

Everyone went into 2017 expecting fireworks

Earlier this week, we hosted our latest MoneyWeek roundtable, which will be featuring in the first issue of January. We have great guests, great tips and great talking points, so I’d suggest that if you’re not a subscriber, you book your copy now (sign up here to get your first four issues free).

But one thing struck me as I went back over the roundtable from this time last year. Back then, everybody was nervous.

2016 had been a year of great change. In June that year, Britain had voted to leave the European Union. In November that year, American voters had rejected Hillary Clinton in favour of a man whose presidency had once seemed so unlikely that it featured in a dystopian satire episode of The Simpsons.

As 2017 dawned, we were heading for a complicated election year in Europe. France in particular, was heading for exactly the sort of election that had thrown everyone in 2016.

Marine Le Pen was the Donald Trump of France. She was going up against François Fillon, an establishment candidate – at the time we’d all scarcely heard of Emmanuel Macron.

And there were even suggestions that Italy could end up with both another banking crisis and another government before too long. At this time last year, for example, Italy’s Monte dei Paschi was being bailed out.

Meanwhile, no one knew what was going to happen with Brexit. There were plenty of theories, but nothing concrete. And while some people thought that Theresa May should call an election, that looked to be off the cards.

And if you’d told anyone that she’d call one anyway, then end up in an even weaker position than she started, and yet still be prime minister by the end of the year – well, you’d have been laughed out of the room.

That’s all before we get to America. There were jitters about geopolitics, which were not at all unwarranted, of course. But regardless of what everyone thought of Trump, people thought he would shake things up and get stuff done.

Instead, we’re now at the end of the year, and he’s only just managed to squeeze through the tax reforms that were meant to Make America Great Again. He certainly has talked and tweeted a lot – but in terms of actual tasks ticked off, his achievements are pretty minimal.

In short, everyone went into 2017 expecting fireworks. And we did get fireworks – in investment markets. But that’s precisely because things largely turned out to be pretty benign elsewhere.

A staggeringly good year for investors

It really has been a vintage year for stockmarkets. The total return on the FTSE 100 this year is sitting at more than 10% – and it’s been one of the disappointing markets.

If you’d bought Greece (as we suggested in December last year), then you’d be up something like 30% by now.

Bonds have not collapsed, despite threats to the contrary near the start of the year. Residential property in the UK has stalled somewhat – and bubbles elsewhere in the world, such as Sweden and Australia, look at risk of deflating – but it’s still nowhere near affordable.

Gold has felt as though it’s had a mediocre year, and yet again, in dollar terms, it’s up about 8% (in US dollar terms, to be fair – it’s much less in sterling). That’s not usually a return you’d turn your nose up at, but it’s certainly been disappointing by the standards of this year.

Of course, it all pales by comparison with bitcoin and cryptocurrencies. All I’ll say on that is this: if you made the call to get into them at the start of the year, and you’ve now made a life-changing sum of money, then cash out the life-changing bit, and keep the excess riding in the market.

That way, if things collapse, you still managed to get your “escape velocity” money out. And if things don’t collapse, you offset those dangerous “Jim Bowen syndrome” regretful feelings by still having a stake in the market (for the youthful, “Jim Bowen syndrome” refers to the gameshow host’s “here’s what you could’ve won” catchphrase, when showing losing contestants the wonderful prizes they had foregone).

The bears have been beaten down

Yet now, at the end of 2017, with markets rocketing, interest rates on the rise, and invisible money of indeterminate purpose soaring by thousands of percent in a matter of months – complacency has set in.

At last year’s roundtable, there was a palpable sense of excited nervousness. At this year’s – even the cautious participants were struggling to see the catalyst for a bad year.

The same basic issues that were there at the end of last year are still here – the potential for rising interest rates, the potential for political upheaval (the mid-terms in the US, the Italian elections, Brexit) – but just another year older.

The main difference is perhaps that expectations are different. Last year, everyone thought that the forthcoming French election might blow up the eurozone. This year, no one cares less about the forthcoming Italian election.

Last year, it was easy to surprise to the upside, because people were jittery about the downside. This year, it’ll be easier to surprise on the downside.

Does any of that mean we’re going to see a meltdown, or a crash, or a financial disaster of some sort? No. But there’s noticeably a lot more complacency around than there was. And that’s in a market that’s already spectacularly laid back and by everyone’s admission, somewhat overvalued.

We’ll look at more specific predictions for the year ahead in our early January issues of MoneyWeek magazine. But for now I’d just say – keep your eyes open, make sure your portfolio is where you want it to be, and just be prepared for 2018 to offer a bumpier ride than 2017 did.