2017 saw a super-heated stock market and steady economy with low inflation and low unemployment, but are the boom times sustainable in 2018? Chris Cordaro, the chief investment officer at the financial planning and investment management firm RegentAtlantic recently spoke with Business Correspondent Rhonda Schaffler about what New Jersey residents can expect from 2018.
Schaffler: When we look back for the year for investors, the stock market in particular had record after record, very strong gains, as we wind down the year. What was behind the big move in stocks?
Cordaro: This was an unprecedented year in that almost every single month was positive. We haven’t had that in a really long time, and what was behind that was really the economy. The economy since 2009 has been slowly and steadily growing, and building momentum, so there was a lot of pent up demand for a good market year. And when Trump won the election, there was enough good euphoria behind that that it kept propelling the market forward. So part of it, Trump was the catalyst that got it going, but it was the underlying economics of it that really kept it going.
Schaffler: One thing that’s interesting about the national economy, in particular, is that we are in a very long economic cycle. It might not feel like that because it started out from a very steep recession, but some people worry that the economy is due for a pull back, or a recession that we typically don’t see economic growth this long. Is that something that we should be worrying about heading into the new year?
Cordaro: I get it. I get why people are concerned because we’ve been going on since we’ve pulled out of this in 2009. It’s been a slow, steady recovery without a lot of pause or pull back. People shouldn’t be too concerned. The economy is still not at full capacity, so we’re not running all out. We’re still slowly getting into this recovery, and the recovery has been slow and steady. It’s been below average economic growth. Usually we want to look at something like 3 percent or so for GDP growth, we’ve just recently hit that. Since 2009, it’s just been slowly, steadily building. So we still have a lot more room for the economy to keep going. This latest tax policy, that’s going to help things more. So, we’re really starting to level out and sort of reach the peak of it, but we don’t have to be concerned that there’s going to be an abrupt decline.
Schaffler: I guess one thing that’s troubling is that many people still feel left out of the economy, so the nature of growth is changing. You need technical skills, for instance, if you’re a worker. What do you make of the way the economy is changing and molding into something that, perhaps even a generation ago, people could not even imagine some of the jobs and opportunities out there.
Cordaro: It’s a much different economy. It’s the gig economy, so you have people that are crafting different ways of working, maybe having multiple jobs. It’s definitely a skilled economy where you need some sort of skill to really get ahead and keep going. And I think also from the standpoint of people not feeling like there was a recovery, it’s because in a lot of areas there really wasn’t a great recovery. There wasn’t a huge increase in wages that people felt. Although the economy has grown and we’re in a much better place than we were 10 years ago, it doesn’t feel that way for people. So, there’s still a lot of trepidation out there.
Schaffler: In New Jersey, we have seen our economy grow, but perhaps one of the big issues heading into 2018 will be what happens with people’s homes and property values with changes in Washington. Is it a risk that we’ll see a slowdown in housing appreciation?
Cordaro: Unfortunately, yes. I think the tax bill is very poor for New Jersey. It’s going to hurt New Jersey, and the problem is that it made it punitive to live in a higher-income tax and higher-property tax state like New Jersey. My fear is, what I think we’re going to see happen is wealthier New Jerseyans are going to leave the state, and that’s going to cause more problems because that means our tax base is going to erode, and that then puts more and more pressure on the people that are left. Not a great deal out of Washington when you look at it as being a New Jerseyan. I love New Jersey, so I hate to see that happen.
Schaffler: I want to ask you about some of our older residents in New Jersey. A lot of residents that put their money into bonds, or fixed income, as safety. Now that’s been very hard if you’ve got what used to be called a passbook saving account, right, because we aren’t seeing that sort of interest. We’re seeing stocks move higher, not so much for fixed income. What do you tell investors like that who have to worry about holding onto their money and are nervous about putting it into the stock market?
Cordaro: It’s a really important point. What’s happened since the recovery is that because interest rates have been so low, people are just yield hungry, especially retirees. They’re just looking for yield.
Schaffler: And yield hungry means a higher interest rate.
Cordaro: They’re looking for higher interest rates, and what’s happened, and where they really need to be careful in 2018, is people are taking more and more risk to get that higher income. They’re spending more and more money to get a higher income, either on bonds that have lower credit quality ratings, or stocks that pay high dividends, but may not be very good quality. This is the time period to really take a look at that and if you’re taking on more risk than you should be to reach that yield, you need to pare back. Rates are going to increase in 2018. The Federal Reserve will keep increasing rates, and interest rates will get back to a more natural level. As that occurs, if you’re extended out on maturities, if you own bonds that have a very long time of maturity, you’re facing a great deal of risk that the prices of those instruments may go down.
Schaffler: Are you worried at all about inflation? The Federal Reserve will be raising rates to get in front of inflation. We haven’t had to think about that for a very, very long time with some exceptions, say rent for instance, which has increased. But generally speaking, are you very worried about inflation and higher costs for people heading into next year?
Cordaro: I don’t see inflation as a big risk at all. So, what’s happened is we haven’t really faced very serious inflation until we go all the way back to the 1980s. And what happens there is that as the world has become a global economy and we compete all over the world, anytime there’s any hint of inflation here it gets muffled out by the rest of the world. So, I don’t see inflation as a big risk in 2018, and I think the Federal Reserve will be raising rates so that will help dampen down any inflationary threats.
Schaffler: How about the stock market for 2018? Is there any way it can repeat the performance of 2017?
Cordaro: That is the big question. That’s what everybody wants to know. Is the market too high? There’s real concern that the market has got ahead of itself and is too high. The market may be richly priced, so evaluations are fairly rich, so you’re paying a little bit higher price for things, but it’s no reason that the market has to crash. What I believe will happen is that over the next 10 years, we’ll likely see lower returns than average from the market. On average, the market returns 10 percent, for the next 10 years, I think it’ll be more like 7 percent. But it doesn’t mean to get there that we’re going to have a crash next year or even the year after. It could be just be slower growth from here on out.