The more things change, the more they stay the same. On Tuesday, equities continued with the bullish momentum of 2017. The S&P 500 was up 22 points (0.83%), the DJIA was up 99 points (0.40%), the NASDAQ was up 59 points (0.84%) and the Russell 2000 was up 14.5 points or (0.84%). Yesterday, equities put in a repeat performance. The S&P 500 was up 17 points (0.64%), the DJIA was up 105 points (0.42%), and the NASDAQ was up 104 points (1.5%). The Russell 2000 was the only lager as it was up only up 2.6 points or (0.17%).
With price action like this, the question on everyone's mind is, will 2018 look like 2017. The rally of the last few days was broad-based suggesting the bull has some legs, but two day's price action is not enough for the foundation of a prediction. Whether or not 2018 is an up, down, or flat year, there will be individual stocks and sectors that should outperform the broad averages. The large-cap tech stocks are extending their overvaluation and one has to ask how far this rubber band will stretch. Yes, they will be helped by the lower tax on repatriated earnings, but the benefit to high PE stocks only brings their valuations closer to fair value and does not make them cheap. Stocks that trade at PEs below the market averages, especially those in the single digits or low teens should do the best the most from the lower corporate tax rates. As a result, if things go pear-shaped, large-cap growth will probably get hit the hardest and value names will hold their own. Since our security selection process is built on valuation, sentiment and price action to generate high risk-adjusted returns, we often find investments that have been left behind but poised to do better. One sector that has been beaten up last year are REITs and so we are going to take a moment to take a closer look.
