THE QUARTER IN BRIEF
The final quarter of 2017 was a great one for stocks: the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all posted 3-month gains of better than 6%. Landmark federal tax reforms were approved and signed into law. Oil and gold prices rose. Home buying accelerated, even though mortgages grew more expensive and listings remained thin. Domestic indicators showed continued strength in consumer spending and hiring as well as a pickup in economic growth. The Federal Reserve made another interest rate hike and started to reduce its balance sheet, while the European Central Bank prepared to wind down its long-running stimulus. All in all, it was an eventful and positive quarter for investors.1
DOMESTIC ECONOMIC HEALTH
Without question, the fourth quarter’s major story was the passage of the Tax Cuts & Jobs Act. The new law created night-and-day changes in the Internal Revenue Code, nearly all effective January 1. Its most dramatic changes were arguably the ones benefiting businesses: it slashed the corporate tax rate to 21% and let the majority of pass-through companies deduct the first 20% of income. The legislation also took the individual estate tax exemption north to $11.2 million, put the standard deduction at $12,000, and did away with dozens of longstanding deductions, plus the personal exemption. In 2019, it removes the individual mandate for health insurance. Most of the above changes are set to expire after 2025, barring renewal in Congress.2
Consumer spending improved in the quarter. The Department of Commerce recorded a (revised) gain of 0.2% for October and a 0.6% rise in November. Retail sales were up 0.4% in October and 0.8% a month later.3,4
Those numbers reflect consumer optimism, affirmed by fall readings for the key U.S. consumer confidence indices. The University of Michigan’s monthly sentiment gauge actually declined during the quarter from 100.7 to 98.5 to 95.9, but these numbers are still well above historical averages. As for the Conference Board’s index, it hit a remarkably high peak of 128.6 in November and ended Q4 up at 122.1.3,5
October and November were the best months for job creation since the middle of 2016, with the Labor Department recording net payroll growth of 244,000 hires in the former month and 228,000 in the latter. The main jobless rate reached 4.1% during November, while the rate for both unemployment and underemployment (the U-6) ticked up to 8.0%.6,8
The Institute for Supply Management’s twin purchasing manager indices fell a bit from their lofty Q3 heights, but their fall readings were still superb. ISM’s services PMI went from 60.1 in October to 57.4 in November. Its factory PMI was at 58.7 for October and 58.2 a month later. Hard good orders, as measured by the federal government, fell 0.4% in the tenth month of the year, but rose 1.3% in the eleventh.3
Consumer and wholesale prices increased 0.4% in November. For the Producer Price Index, the advance replicated that of October; the Consumer Price Index was up only 0.1% the prior month. The Federal Reserve’s core PCE price index advanced just 0.2% for October and 0.1% for November.3,7
Speaking of the central bank, it started unwinding its vast securities portfolio and hiked the federal funds rate another quarter point in December, resulting in a new target range of 1.25%-1.5%. Among the economic indicators that likely fostered that decision was the final federal government assessment of Q3 growth: a strong 3.2%. The Fed also raised its projection of 2018 Gross Domestic Product (GDP) to 2.5% from its previous forecast of 2.1% and its latest dot-plot indicated three rate hikes for the new year.3,8
GLOBAL ECONOMIC HEALTH
While Spain grappled with the Catalonia region’s desire for independence and the United Kingdom contended with European Union demands involving its Brexit, there was much good news concerning the overall E.U. economy. The jobless rate across its 28 member countries continued to descend, falling to 7.4% in October. Inflation, barely above 1.0% at the end of 2016, increased to 1.8% in November. The European Central Bank kept interest rates steady in the quarter and announced it would buy fewer bonds per month; its monetary stimulus is expected to last through Q3 2018. In December, the ECB projected 2.3% growth for the E.U. economy in 2018.9,10
Economic data streams from the Asia-Pacific region offered plenty of positive news this fall. While the Caixin/Markit manufacturing PMI for China reached a 5-month low of 50.8 in November, manufacturing PMIs in Asia’s leading electronics producers were up. Japan’s factory PMI hit a peak unseen since 2014 in November, while manufacturing PMIs in South Korea and Taiwan respectively displayed their best readings since mid-2013 and mid-2011. South Korea’s Bank of Korea raised interest rates in Q4, becoming the first major central bank in Asia to hike in three years.11
The MSCI Emerging Markets index had another fine quarter, ascending 7.09% (it gained 34.35% for the year). Its sibling, the MSCI World, went +5.14% in Q3 (and +20.11% for 2017). Big gains were the order of the quarter: take the Nikkei 225, which had a price return of 11.83% across the last 13 weeks of 2017. Other fine performances: S&P/ASX All Ordinaries, +7.35%; Sensex, +8.86%; Hang Seng, +8.58%; FTSE 100, +4.27%; S&P/TSX Composite, +3.67%.12,13
There were a few minor gains and losses. The CAC 40 went -0.32% for the quarter, and to the east, the Shanghai Composite turned in a -1.25% 13-week loss. The DAX advanced just 0.69% in the fourth quarter.13
Palladium was the other big commodities story of the year; it advanced 13.8% in Q4 on its way to a 2017 gain of 54.3%. Two other major commodities outperformed it in the quarter: cotton rose 16.0%, while WTI crude improved 15.7%. Sugar rose 7.5% for Q4; silver, 2.2%; platinum, 2.0%; gold, 1.6%. As for Q4 retreats, the U.S. Dollar Index slipped 0.8%; soybeans, 2.7%; coffee, 4.1%; corn, 4.6%; cocoa, 7.0%; wheat, 8.5%; natural gas, 10.5%.15
Regarding the Q4 settlements that perhaps mattered most, gold ended the year at $1,305.10; silver, at $16.98; WTI crude, at $60.10.16
Mortgage rates climbed higher in the quarter. Freddie Mac’s December 28 Primary Mortgage Market Survey revealed the following interest rates: 30-year fixed, 3.99%; 15-year fixed, 3.44%; 5/1-year adjustable, 3.47%. Compare the numbers from the September 28 PMMS: 30-year fixed, 3.83%; 15-year fixed, 3.13%; 5/1-year adjustable, 3.20%.17
Home buying emerged from a Q3 slump in Q4. Resales rose 2.4% in the tenth month of the year and then 5.6% in the eleventh, according to the National Association of Realtors. (NAR’s pending home sales gauge, incidentally, was up 3.5% in October, but just 0.2% in November.) New home sales, seemingly always volatile, were 1.7% lower in October, but jumped 17.5% in November.3
Looking at other real estate indicators, October brought improvements of 8.4% for housing starts and 7.4% for building permits; groundbreaking increased by another 3.3% a month later, with permits contracting 1.4%. October’s S&P/Case-Shiller home price index (released in December) was up 6.4% from 12 months earlier.3
LOOKING BACK…LOOKING FORWARD
As the table beneath this paragraph shows, the blue chips had a phenomenal quarter, outpacing Wall Street’s two other major stock benchmarks. The Dow settled at record highs 70 times last year; the S&P 500, 62 times. The gains in the fourth quarter made 2017 the best year for stocks since 2013. The Russell 2000 rose 13.14% for the year, while the CBOE VIX slumped 21.37%. The year-end settlements: Dow, 24,719.22; Nasdaq, 6,903.39; S&P, 2,673.61; Russell, 1,535.51; VIX, 11.04.18,19
1 YR AGO
5 YRS AGO
10 YRS AGO
10 YR TIPS
Sources: wsj.com, bigcharts.com, treasury.gov – 12/29/171,20,21,22
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.
These returns do not include dividends.
Wall Street seems primed for a bullish first quarter. Institutional investors are hopeful that 2018 may surprise to the upside, just as 2017 did. The economy’s 2-3% growth will probably continue in the near term, and corporate earnings should get a boost from the tax reforms in the months ahead. All that said, warnings continue to sound that the market is overpriced; the S&P 500 is now trading at about 18x forward earnings. The exuberance around equities does not always feel rational. Nearly two years have passed without a correction (a downturn greater than 10%) in the S&P, and the index had no more than a 2% downturn during all of 2017. We look at this first quarter optimistically, but be aware that the market is still susceptible to left hooks and gut punches from geopolitical events and the gradual erosion of confidence that can sometimes emerge to accompany an aging business cycle. Hopefully, bulls will not slow to a trot as 2018 proceeds.18
THE CASE FOR EMERGING MARKETS
While superior growth potential has historically been a key reason to allocate to emerging markets over developed, the former has not delivered in recent years. In fact, 2016 was the first time in five years that emerging market earnings per share grew faster than developed market earnings per share. Read more.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. All economic data is historical and not indicative of future results.
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The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.
Beta measures a portfolio’s volatility relative to its benchmark. A Beta greater than 1 suggests the portfolio has historically been more volatile than its benchmark. A Beta less than 1 suggest the portfolio has historically been less volatile than its benchmark.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.
Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.
1 - quotes.wsj.com/index/SPX [12/31/17]
2 - cpapracticeadvisor.com/news/12388205/2018-tax-reform-law-new-tax-brackets-credits-and-deductions [12/22/17]
3 - investing.com/economic-calendar/ [10/1/17]
4 - bloomberg.com/news/articles/2017-12-14/u-s-retail-sales-increased-0-8-in-november [12/14/17]
5 - tradingeconomics.com/united-states/consumer-confidence [12/2/17]
6 - fortune.com/2017/12/08/november-job-report-unemployment-rate/ [12/8/17]
7 - tickertape.tdameritrade.com/marketupdate/2017/12/fed-move-and-yellen-words-awaited-28747 [12/13/17]
8 - cnbc.com/2017/12/13/fed-hikes-rates-by-a-quarter-point.html [12/13/17]
9 - ec.europa.eu/eurostat [12/29/17]
10 - nytimes.com/2017/12/13/business/economy/ecb-draghi-rates.html [12/13/17]
11 - businessinsider.com/r-global-economy-asian-manufacturing-expands-further-but-china-remains-a-risk-2017-11?r=UK&IR=T [12/1/17]
12 - msci.com/end-of-day-data-search [12/29/17]
13 - news.morningstar.com/index/indexReturn.html [12/31/17]
14 - tinyurl.com/y7f355aq [12/31/17]
15 - barchart.com/futures/performance-leaders?viewName=chart&timeFrame=3m [12/31/17]
16 - money.cnn.com/data/commodities/ [12/29/17]
17 - freddiemac.com/pmms/archive.html?year=2017 [12/31/17]
18 - cbsnews.com/news/for-wall-street-2017-was-one-for-the-record-books/ [12/28/17]
19 - markets.wsj.com/us [12/29/17]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F29%2F16&x=0&y=0 [12/29/17]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F29%2F16&x=0&y=0 [12/29/17]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F29%2F16&x=0&y=0 [12/29/17]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F28%2F07&x=0&y=0 [12/29/17]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=12%2F28%2F07&x=0&y=0 [12/29/17]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F28%2F07&x=0&y=0 [12/29/17]
21 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [12/29/17]
22 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [12/29/17]