The holidays are a good time to reflect on the year that was, appreciate our friends and families, and of course look forward to opportunities in the New Year. The past year provided no shortage of opportunities for reflection on a year that felt like there was a disconnect between perception and reality. Some of the discourse coming out of Washington approached pre-school levels and geopolitical events are on the rise; nevertheless, markets continued their march higher. New asset classes such as crypto-currencies have roared ahead as has any company loosely associated with them, resulting in absurd valuations. For select sectors, securities, and asset classes, a term made famous in the late 1990’s, "irrational exuberance", feels appropriate.

The move higher in global markets was driven by the US, followed closely by Europe which is showing signs of stability and, dare we say, sustained growth. In the US, as we discussed in our commentary a year ago, fiscal stimulus would be the driving theme. Despite the negative rhetoric politically and socially, deregulation and tax cuts did come to fruition and the markets reacted accordingly. Strong employment gains continued in 2017 and emergent wage pressure allowed the US central bank to begin raising rates. Growth appears to be on a strong footing which will be needed to keep deficits under control.

European economies continued to improve, in part thanks to a very accommodative monetary policy from the ECB. German unemployment is at a 30-year low and “Brexit” fears are appearing more manageable as growth in the UK has slowed but certainly has not fallen off a cliff. The wave of nationalist sentiment appears to have abated as we saw in France with Macron’s victory over the extremist views of La Pen and The National Front. Indeed, the reforms promised in France are encouraging with a loosening of employment restrictions and privatizations of state controlled firms. For anyone who has flown into France, there is no greater symbol of inefficiency than Charles de Gaulle International Airport, which is top of the list of holdings for sale.

Asian and emerging markets also performed well with Japan continuing its positive, if not subdued, growth trend. The challenge for Japan will be how to stimulate growth beyond monetary policy where they have pushed their 10 year bond rate down to an eye popping 0.05%! The long run implications of this are uncertain but one cannot expect this to continue indefinitely. China saw a rebound in export growth after two weak years and its domestic economy continued its strong growth trajectory. Property values and debt levels remain among the biggest risks to China going forward and bear watching.

Canada’s stock market lagged developed markets in 2017 after leading the pack in 2016. Energy in particular was a surprising laggard despite the rebound in the price of oil - another disconnect during the year which we wouldn’t expect to persist in 2018. That said, the economy continues to perform well as evidenced by strong employment growth throughout the year. In response to the resurgent economy, the Bank of Canada reversed course with a couple of rate hikes which resulted in a rebound in the Canadian dollar. While we would agree with this ‘normalization’ of interest rates, the effects on the economy and more specifically the housing market and exporters, needs to be managed carefully. NAFTA renegotiations and tighter mortgage rules are further headwinds which could emerge; however, valuations appear reasonable compared with many other markets.

Of course Canada is not immune to the idea of disconnect between fundamentals and valuations as evidenced by the euphoria in marijuana stocks. The concept of the “greater fool” is a cynical theory that often feels relevant in momentum lead markets. When valuations cease to be of importance, it is often said that the only way for investors to continue to profit is to find a greater fool to purchase their assets at higher prices. While we do not see the entire market at risk of this, there are definitely areas where we would be unwilling to consider an investment.

Perhaps the most surprising observation in the last year has been the historically low volatility in stocks. As we are effectively in the 10th year of a recovery from the financial crisis, we would expect to see some volatility emerge over the next year. That being said, if you had the benefit of foresight in terms of news flow last year, you would have likely bet the same. Timing of any pullback is impossible to predict but global economic growth should support stocks with reasonable valuations in the medium term.

What will be important going forward is to ensure that there is no disconnect between reality (fundamentals) and valuations. We will leave the short-term prognosticating to the pundits and economists, and will continue to exercise discipline and diligence in our processes. Critically assessing individual companies and their prospects over the long term is far more important in terms of guarding and growing our clients' capital. This has always been and will remain our core focus.

We wish you a healthy and happy 2018 and look forward to working with you over the coming year.