Content provided by Mark Matthews, Investment Research Analyst

While short on market volatility, 2017 suffered no shortage of excitement. Major U.S. indices went on a tear with both the S&P 500 and Dow Jones Industrial Average (DJIA) setting all-time record highs. However, the biggest theme of 2017 was the breakout year in cryptoassets.

Cryptoassets took the market by storm. At the start of the year, the total value of cryptocurrencies stood at just $15 billion; but by the end of the year, that number had reached $500 billion. While Bitcoin dominated the headlines, the parabolic appreciation of cryptos in 2017 was due in large part to the emergence of competing coins. Just one year ago, Bitcoin made up 90% of the cryptocurrency market and was the lone coin with a total value of more than $1 billion. Now, there are 36 coins with a total value greater than $1 billion and Bitcoin accounts for less than 40% of the market. One may ask how an asset that returns more than a 1,000% in a year loses a vast majority of its market share. As the graph below shows, Bitcoin’s astonishing performance doesn’t even rank in the asset class’s top 10. Such a phenomenon could only happen in the volatile world of cryptocurrencies.

Not to be outdone, the U.S. stock market had a stellar year as well. Fueled by signs of global economic expansion and the hope for tax reform, which ultimately came at year’s end, the DJIA hit 71 record highs. That eclipsed the previous mark of 69 that was set in 1995 when the DJIA closed above 5,000 for the first time. The S&P 500 set records of its own. For the first time, the index saw a positive return every month for an entire calendar year. To put that into perspective, despite positive monthly returns occurring 60% of the time over its 147-year history, the S&P 500 has had a streak of 12 consecutive months or more with positive returns just six times — none of which happened in a calendar year. This makes the possibility of such an event recurring very unlikely, but nothing is impossible.

Perhaps the most prevalent theme of the U.S. stock market’s performance in 2017 was the sweeping outperformance of growth-oriented stocks over value stocks. Growth outperformed value by 17%. While growth has outperformed value six of the previous 10 years for a cumulative outperformance of 34%, the gap between the two hasn’t been this wide since 2009.

The biggest driver of this outperformance was the dominant year for technology, which finished up 37%. Of the best performers, growth-oriented sectors accounted for four of the top five. Value sectors, on the other hand, accounted for four of the five worst performing sectors. The most surprising of these was energy. Despite oil rebounding to normal levels and the energy sector having the biggest year-over-year growth in overall earnings contributions since the financial sector rebound post-Great Recession, 2017 returns for the sector were negative. In fact, 2017 marked the first time since 2002 that crude oil was up, while the energy sector was down.

So, what does all this mean for the markets? Well, that’s anyone’s guess. With U.S. markets at all-time highs and valuations as stretched as they’ve ever been, one would expect a market pullback. However, continuously climbing sentiment, market-favorable fiscal policy, and the potential for infrastructure spending could allow the market’s historic rise to continue. Or, the long-anticipated correction could finally surface.

Additionally, the efficacy of the cryptoasset space cannot be ignored. Developments in innovation, regulation, and governance could give way to substantial staying power for the asset. On the other hand, however, such an unprecedented run-up (not seen since the silver rally of the late 1970s) highlights the speculative craze surrounding the space and could mark the biggest bubble markets have ever seen.

So much uncertainty highlights the importance of maintaining a disciplined and diversified approach. It goes without saying that it’s very likely many, if not most, of the cryptocurrencies investors are raving about today will not be around in the future. Further, markets are cyclical, and at some point a correction is a virtual certainty. For these reasons, CLS employs a balanced and Risk Budgeted approach to managing portfolios and will continue to hunt for cheap assets to add value for our clients.