In 2017, we witnessed a great year in the market. The S&P was up 23 percent for the calendar year. The Dow Jones hit all-time highs. The volatility index, known as the VIX, which measures market volatility and is colloquially known as the “fear gauge,” was down 17 percent in 2017, the lowest in decades. With the turmoil surrounding the election and other international crises that happened in 2017, it is even more remarkable that the volatility index decreased as much as it did. But why?
Understanding why 2017 did so well will be difficult. You might get a different opinion from everybody you ask. It is never just one thing that causes the market to do well. A variety of factors contributed to the market upswing, and I am going to focus on what I believe was one of the major contributors: deregulation.
Meriam-Webster defines deregulation as “the process of removing or reducing state regulations, typically in the economic sphere. It is the undo repeal of governmental regulation of the economy.” Its goal is to improve the ease of doing business. The idea is that by removing regulations, companies are better suited to compete in the global marketplace.
How does deregulation happen? The first way is through legislative action. Congress can vote to repeal a law. Second, the president can issue an executive order removing regulation. President Trump issued 55 executive orders in 2017. The last way is that a federal agency can stop enforcing the law altogether.
In 2017, we saw deregulation in all three of the areas. We saw regulation roll back in several industries — telecom, financial, environmental and health care, to name a few. Some of these regulatory changes are big and some are small, but they all have an impact. One example of what I think is a big piece of regulatory change is the net neutrality bill. The Federal Communications Commission has listed the internet under Title I, which makes the internet similar to utility companies in that internet providers are not able to change speed or access for its users. Providers are “net neutral.” In December 2017, a repeal of this rule allowed internet providers to voluntarily commit to this principle, thereby moving to Title II and becoming “common carriers.” It is unknown what the impact is going to be to us, the end users, but opinions vary, both for good and bad. Either way, the tech industry enjoyed a great 2017!
Here is the point. Historically, a period of deregulation is followed by an immediate period of boom times. You can go as far back as the French Revolution to see examples of this. When the market is deregulated, the market goes up. The concern, however, is now that we are through 2017 and into 2018, what will continue to happen? If we use history as our guide, the period following the boom time after deregulation is followed by busts. One of the major cons to deregulation is that it can create asset bubbles that are more likely to build and burst, creating crises and recessions.
I am not suggesting that we are heading for a major market correction in the near future. I do not have a crystal ball, and predicting the future is obviously impossible. The point of this article is to outline a contributing factor resulting in a great 2017 for the markets and to illustrate that, historically, periods of deregulation have led to market increases, which then have led to market downturns. Evaluate how you did in 2017 and make sure that you are well positioned in the event of a market downturn in the future. Do you have a balance between asset classes, known as diversification? Diversification is still a good way to mitigate risk. If you don’t know where you stand or you have questions about how the market is affecting your retirement savings, you should ask a financial professional to review your portfolio. Deregulation and market changes affect everyone, so be proactive to safeguard your hard-earned savings now and in the future.
Opinions expressed are that of the author and are not endorsed by the named broker dealer or its affiliates. All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. Certain statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. It is not possible to invest directly in an index. Past performance cannot guarantee future results. Diversification does not guarantee a profit or protect against a loss in a declining market.
Premier Planning Group is an independent firm with securities offered through Summit Brokerage Services Inc. Member FINRA www.finra.org and SIPC www.sipc.org. Located at 115 West Street, Suite 400, in Annapolis, Premier Planning can be reached at 443-837-2520.