Vinyl record-cutting machine. Photo: JacoTen. Source: Wikipedia
Looking back, it was a year of records.
The stock market is closing at or near its all-time high; the Dow hit a record level 69 times this year (so far). And for the first time in a long time, the US wasn’t the strongest large market in the world. While the S&P 500 is up 22%, the Chinese stock market is up 24% in local terms and 31% in dollar terms. And large-cap Chinese companies were prominent in the global averages. Of the top ten performing global companies, four of them were Chinese firms. Payment giant Tencent Holdings was up 115% last year – an amazing feat for a company worth hundreds of billions of dollars.
And what’s driving these returns? Record earnings. Tencent will earn almost $7 per share this year – up 38% from a year earlier. Cyclical giants like Caterpillar or Deere are also seeing their earnings soar, driven by a global construction boom. The S&P 500 enjoyed earnings growth of over 20% in 2017, after a flat year in 2016 and a decline in 2015. And with the global economy growing so well, earnings are expected to be up more than 10% next year, too.
All those earnings are helping to generate jobs around the world. Unemployment in the US is just over 4%, near its lowest level ever; in Germany it’s at its lowest level since reunification; in Japan, it’s under 3%. The Global Financial Crisis and Euro Crisis are clearly behind us. And while wages aren’t growing very fast yet, it’s only a matter of time before tight labor markets push them higher, too.
Inevitably, all this wealth creates excesses. A painting of Jesus by Leonardo da Vinci, Salvador Mundi, was sold at auction for $450 million, more than doubling the previous record. Chinese wealth has poured into real estate, making Hong Kong property even more expensive. A pair of luxury apartments sold for $1.16 billion. The market value of all the bitcoins mined would now make it one of the most valuable companies in the world, just behind Wal Mart. And this is even though it’s almost impossible to do anything with bitcoins other than trade and transfer them anonymously. But with all that wealth being generated by the markets, maybe there’s a record need for anonymous wealth transfer.
MSCI All-Cap World Index. 1987=100, Log scale. Source: Morgan Stanley, Bloomberg
What’s in store for next year? That’s what everyone wants to know. And a subject for another day.
Douglas R. Tengdin, CFA