As 2017 closed, it has become clear that the "animal spirits" that guide the markets can shake off natural disasters, populist uprisings, a nuclear threat, and an ongoing stream of fodder for what once would have been Presidential scandals, but now pass for business as usual in the Trump Administration. The rally in U.S. equities, founded on solid economic data and buoyed by optimism around a pro-growth platform as promised by the Republicans in the White House and Congress, continued essentially unabated. Indeed, the S&P 500 closed up over +20% for 2017, with little volatility to boot. The gains were led by the technology sector, which closed up almost +39% on the year, with several other sectors (materials, consumer discretionary, financials, and healthcare) also outperforming the benchmark. Notable laggards were energy and telecommunications, with both sectors ending the year in the red. Small caps underperformed large and mid-cap stocks on the year – despite a nice boost in the back half from tax reform – and the marked outperformance of growth over value stocks extended across the capitalization range.
International developed stocks also posted a strong year after consistent underperformance when compared with U.S. stocks following Europe’s sovereign debt crisis. European stocks led the way higher in 2017, spurred by economic strength and continued accommodation from the European Central Bank. Small cap stocks, which had been the bright spot for international developed markets the last several years, once again outperformed large caps, and while growth outperformed value, the spread was narrower than that experienced in the United States. Emerging markets stocks, which had suffered under fears of a Chinese debt bubble and the sharp drop in oil prices, enjoyed a weaker U.S. dollar and global growth in 2017, earning the benchmark a whopping +37% gain for the year.
Within fixed income markets, despite fears of Fed tightening and a tough backdrop for bonds, most U.S. bond indexes closed the year higher. While many expected yields to march towards the 3% mark during the course of the year, the 10-year Treasury yield actually fell all the way to 2.04%, and only hit a high of 2.62%, eventually closing at 2.41% — essentially right back where it started. Credit outperformed government bonds for the year, as strong corporate results and positive economic data kept spreads tight. Municipals also closed the year higher, despite concerns around tax changes and specific issuer credit concerns. In both the corporate and municipal markets, risk reigned supreme, as high yield outperformed investment grade once again.
Commodities closed higher on the year, led by gains in crude oil, with WTI up +12.5%. Precious metals and copper also posted gains, while agricultural commodities were mixed. REITs were higher on the year as well, although rising interest rates capped gains versus less interest rate sensitive equities. The U.S. dollar, which was expected by most forecasters to rise in 2017, closed down -9.8%, its biggest decline versus a basket of currencies in 15 years.
Q1 2018 – Economic and Market Perspective
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