AT THE BEGINNING OF 2017, A COMMON VIEW AMONG MONEY MANAGERS AND ANALYSTS WAS THAT THE FINANCIAL MARKETS WOULD NOT REPEAT THEIR STRONG RETURNS FROM 2016. Many cited the uncertain global economy, political turmoil in the US, implementation of Brexit, conflicts in the Middle East, North Korea’s weapons buildup and other factors. The global equity markets defied their predictions as major equity indices posted strong returns for the year.
In the fourth quarter alone, the US Stock Market was up 6.34 percent, while Emerging Markets continued their year-long leadership position, up 7.44 percent for the period. A globally diversified portfolio of 50/50 stocks/bonds returned 3.02 percent for the quarter and 12.14 percent for the year.
In the US, Large cap growth stocks led the returns, up 7.86 percent for the quarter and 30.21 percent for the year. By comparison, Large cap value stocks as represented by the Russell 3000 value index, returned just 13.2 percent for the year. Small cap stocks under-performed large cap stocks by a similar margin. However, of note, over almost every full market cycle, small cap and value stocks have outperformed their counterpart large cap and growth stocks.
Despite strong returns, the US ranked in the bottom half of countries for the year, placing 35th out of 47 countries in the MSCI All Country World Index. Thus, reinforcing our continued call for holding diversified portfolios, not just by stock size or industry, but also geographically.
In 2017, the global economy showed strong growth, with 45 out of 47 countries tracked by the Organization for Economic Cooperation and Development (OECD) on pace to expand and the markets reflected this. Non-US Internationally Developed countries (Europe, Japan, Canada) logged a 24.2 percent return for the year. Country level returns were even more dispersed during the fourth quarter, ranging from 9.28 percent gain in Singapore to a -2.91 percent loss in Sweden. Emerging Markets had an even more impressive year, up 5.28 percent in the quarter and 37.2 percent return for the year.
In Fixed Income, through actions of the Federal Reserve, the yield curve flattened as interest rates increased on the short end and decreased on the long end of the curve. Both US and International fixed income markets posted positive returns in 2017. The Bloomberg Barclays US Aggregate Bond Index gained 3.54 percent, while the global bond index gained just 1.13 percent.
Looking over other investment categories, the US REIT index was up 1.98 percent for the quarter and 3.76 percent for the year. The Bloomberg Commodities Index returned 4.7 percent for the fourth quarter but just 1.7 percent for the full year.
LOOKING FORWARD, in the near term, positive developments currently far outweigh the negatives.
World economies seem to be gaining rather than losing steam and do not appear likely to be running out anytime soon. Unemployment in the US is down to 4.1%, the lowest level in 60 years, nearing “full employment” (albeit with a lower level of participation rate than historical norms). Recent corporate tax law changes have now put the US on a more equal footing and should result in increased profits. Just recently, Apple announced it would be bringing back the vast majority of the $252 Billion in cash held abroad to make a sizable investment in the United States. Even though the Federal Reserve has announced plans to continue rate increases in 2018, low inflation levels mean this will continue at a measured pace which the markets tend to like. Lastly, corporate earnings continue to grow at a healthy pace.
Even with all of the positive news and momentum, there are a number of areas about which to be concerned. The recovery that started in 2009 has become one of the longest in history (now at 103 months old) which makes most wonder, how long can this last? Market valuations are now among the highest ever no matter how you want to calculate it. Lastly, market volatility has been almost non-existent. 2017 was the first year in history in which the S&P 500 did not decline from high to low by more than 3 percent at least once. The last period with any significant market volatility was January 2016 when the market dropped by more than 7 percent over a two-week period. Market volatility is part of investing; one would reasonably expect volatility to return to a greater degree in 2018.
The year of 2017 included numerous examples of the difficulty of predicting the performance of markets, the importance of diversification and the need to maintain investment discipline. Does January’s strong performance indicate 2018 will also be a good investment year? That is difficult to say. Attached is an article titled "As Goes January, So Goes the Year?" from Dimensional Funds addressing just that question; we believe you will find it of interest.
We wish all of you a blessed and fulfilling 2018 and greatly appreciate the loyalty and trust you have placed in us. As always, if you have any questions or concerns, please contact us and we would be happy to discuss.
Please click here to read the complete TFA Quarter in Review | 4Q 2017.