2017 was a strong year for the markets around the globe.  Here is a brief review of performance and key themes for the year.

Equities

  • Domestic Stocks:

Improving economic performance and the signing of the Tax Cuts and Jobs Act of 2017, aided US stock market performance during the fourth quarter and for the year.

Here in the NYC Metro area, many will be negatively affected by this tax law, as the SALT (State And Local Tax) deductions are capped at $10,000 starting in 2018. Others (including business owners) may gain some benefits. Nothing changes to your taxes for 2017.

[The key changes resulting from the new tax bill are highlighted very well by these articles: 1) NY Times 2) NPR].

For the year, all the major equity indices registered double digit gains: the tech-heavy Nasdaq Composite Index and the popular Dow Jones Industrial Index were the best performing, registering 28-30% upside during the year. The much broader S&P 500 index, was up 21.83%. Small and mid-cap indices were also up strongly, but trailed their large cap peers during the year (up +14 to +16%).

  • In anticipation of lower tax rates (fiscal stimulus) and better economic growth, growth sectors outperformed value stocks this year by a wide margin (+10-15% performance delta).
  • At a sector level, Technology (+38%), Materials (+23.8%) Consumer Discretionary (+23%) were the best
    performing sectors, followed by Financials, Health care, and Industrials. Fear of rising interest rates capped the enthusiasm for some of the higher dividend paying sectors — Telecom, Utilities, Consumer Defensive, and REITs.  Two sectors registered fractionally negative return during the year: Energy and Telecoms.
  • Overseas Equity markets:

After trailing US markets during the last three years, overseas equity markets finally reversed the course, and outperformed or at least matched the strong performance of the US. Falling US dollar index (down 10% in 2017), as well as stable, and improving economic backdrop in Europe and Emerging economies helped fuel the strong gains in those markets. Emerging market index (MSCI EM Index) was up a stellar 37%, while the non-US, developed equity market index (MSCI EAFE index) was up +25%.

  • Last quarter, we marked the 10th anniversary of the prior bull market peak in equities (reached during Q4-2007). Therefore, it is an interesting time to pay a little extra attention to the performance history. Over the last 10 years, most domestic equity indices have returned 8-10% (annualized) while overseas equity markets have trailed the US equity benchmarks substantially — up less than 2% annualized — during this time frame.
  • The chart below (source: Baird Q3 2017 Chart Book) provides a current perspective on equity valuations for the three major global Equity indices.

Global PE Chart

  • Clearly, US valuations are higher in comparison to their international peers. The flip side of this performance delta, between US and overseas equity markets is that overseas markets may outperform the US indices if those markets continue to offer better investment and better risk/return trade-off.  The performance of the US Dollar (currency) will be an equally important element when considering investment returns of foreign asset classes to US investors.
  • Another notable theme for the equity markets this year was the remarkably low volatility (smaller market swings) experienced by most major equity markets here and abroad. The S&P 500 Index has not had a negative performance for the last 15+ months now (since Q4-2016).

Market Volatility

This was despite the high political drama from the White House and the early hiccups for the new administration in implementing their policy agenda. The lesson here is that markets care less about Washington theater as long as earnings and economic backdrop are stable and improving, inflation and interest rates are benign, and there is a tax cut coming ahead for markets, companies and investors!

Bonds

  • Despite three interest rate hikes (0.25% each) by the Federal Reserve, and the ‘tapering’ of bond purchase program that began last quarter, the bond markets have behaved remained calm, with minimal volatility, throughout the year. The benchmark US 10-year bond yield remained in narrow range, and closed at a 2.4% yield, slightly lower than a yield of 2.45% at the close of 2016! Stable inflation readings (below 2%), global savings glut, and much lower bond yields world-wide have helped the US bond market yields to remain benign as well.
  • The Federal Reserve is expected to raise rates 3 to 4 times this year (as per their December meeting minutes). ECB (European central bank) is also set to begin its ‘taper’ program (reducing bond purchases) later this year, and is expected that Japan’s central bank will likely announce such measure this year.  The overall global monetary policy backdrop still remains accommodative/neutral.
  • Inflation and economic growth will likely dictate the course additional changes to central bank actions (versus what is already advertised by them/mentioned above).

REITS and Commodities

  • Commodities bounced back and finally registered a positive performance in 2017. Falling US dollar helped the commodity complex turn the corner this year (commodities usually perform better in a falling US dollar environment). Spot Gold was up over 12% during 2017. Crude oil prices also edged up 13% this year. Rising interest rates and a rising dollar could hurt the commodity complex again in 2018.
  • REITs have continued to perform well over this up market cycle, supported by stable interest rates backdrop. Profit margins remain healthy for most REITs but valuations remain rich for this sector. Additional gains from these levels will depend on the interest rates and inflation backdrop in 2018.

US & World Economy:

  • US economy gained some additional momentum as we closed out 2017. 2018 is likely be another good year for the US economy as the ‘tax cuts/fiscal policy stimulus’ go into effect and people (and companies) see additional money in their pockets, thus boosting consumer confidence and overall spending.

Corporations may choose to repatriate cash from overseas (after the enactment of the new tax law) and possibly increase their capital spending and hiring budgets this year. Conference Board economists anticipate US economy registering close to a 3% growth in 2018.  Below table shows the 2018 inflation and economic growth forecasts for various economies (courtesy of PIMCO).

Finally, no conversation about investments in 2017 would be complete without a reference to the Bitcoin and the Cryptocurrency craze. Here’s a recent TV interview link of the legendary (and wise) investor, Warren Buffet, where he provides his views about Bitcoin (worth watching before investing in Bitcoin.)

As always, please contact us if you have additional questions.

Any information provided has been prepared from sources believed to be reliable, but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation.