Compared with recent years last year was one of the best for the stock market, achieving record highs in returns and a massive growth across indexes, e.g. the Dow Jones index increased by 25 percent, while the Nasdaq and S&P 500 had their best year since 2013 (28% and 19% respectively). Additionally, world GDP, according to IMF projections, has grown 3.6%, both emerging and developed economies have grown, 4.6% and 2.2% respectively. Both US and Europe had a GDP growth of 2.2%, however expectations for US were higher than for Europe which seems starting gaining momentum. China and India continue a trend of lower growth rates, in 2017 projections both stand at 6.7% GDP growth.
Analysts believe that the tax bill proposed by Donald Trump, including among others tax cuts, was one of the main causes for the increase on financial markets. The tax law provides among others incentives that encourage companies to return profits held overseas to the US. This is expected to create new jobs and to increase American companies profits.
Though the one million dollar question of 2017 is: Where is volatility? It was such popular presence in risk management models and suddenly it’s gone. The Vix index one of the measures of expected volatility is at its lowest level ever, but who are the suspects? There are a few: interest rates are at historical minimums, global economy is growing at a steady pace, companies are reporting good earnings and increasing use of passive trading strategies and exchange traded funds. In sum, last year showed some unexpected behaviour since financial models predict that risk should increase when there is a boom in the market, while the risk actually decreased, even achieving record lows!
Is this an offer we cannot refuse? Well, there is some danger out there that should be considered. The low price of debt and a steady volatility have been encouraging investors to leverage their activities and take more risks. In most of the cases volatility is used as measure of risk for risk management models, if volatility is low, models indicate that investor should adopt a more aggressive investment strategy, most of this process is automatic therefore huge amounts of money has been invested, increasing the fragility of financial markets. If some unexpected shock hits economy, it could have dramatic consequences. However, in my opinion, as we know fiscal policy takes time to be transmitted to economic agents, thus, firms and households in general have not yet felt the tax plan impact, which may give room to invest more when the policy is fully transmitted.
Looking at last year we also have to talk about the success and boom of crypto currencies which could change the world we live in. Despite bitcoin, these type of currencies have increased by 3 or even 4 digits in percentage points, coins like Ripple, Ethereum and Stratis doubled more in value. Whether these cryptocurrencies will succeed or not, anyone knows, but some countries have started developing regulations and others had already expressed the will to ban this type of currency out of their countries. Among those stand for example China and Russia which are mainly concerned about taxation, non-traceability, which can be used to develop illicit activities and the lack of control over this currency.
Besides the discussed effects in the economic and market environment several other events happened that affected or still affect the markets, e.g. Trumps’ unexpected behaviour and decision-making, the Brexit, and the struggles regarding Catalunya search for independence. However to sum up, we can say that last year has been one of the best; investors that either invested in crypto currencies or in the capital market have seen their money increase, without facing a lot of risks (for the capital markets).