2017 4th Quarter Market Review – Virtue Capital Management
Global Economic Review
The bull market that had been dubbed “the bull market everyone hates” has extended into the second longest and third strongest bull market in United States history. Although this economic recovery has been the most tepid since the Great Depression, 2017 ended with surprising global economic activity to the upside, and global earnings growth following a similar trend. U.S. GDP registered consecutive 3% quarterly tallies, and, because of the stimulative year-end tax package, economists raised expectations for 2018 economic growth. In response to the resurgence in the economy, the Fed raised interest rates at the December FOMC meeting, while reiterating expectations for three hikes in 2018, and noted that fiscal stimulus may increase pressure to increase the pace of rate hikes going forward.
Source: Strategas Research Partners
This move forward has not been limited to the U.S., but rather appears to be a continuation of synchronized global expansion that has not been seen in over a decade!
Synchronized global growth, improving corporate earnings, low inflation, and easy financial conditions propelled equity markets higher in 2017. U.S. equities benefitted from the President’s pro-growth fiscal policies (deregulation and tax reform). Larger capitalization, growth-oriented stocks led domestic markets higher, with the Russell 1000 Growth Index generating a total return of 30%. The S&P 500 gained 6.6% for the quarter and 21.8% for the year with the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google) accounting for more than a quarter of the S&P 500’s gain for the year. In what appeared to be a relentless and steady march forward, the S&P 500 did not have a single day where it lost or gained 2%. In fact, there were only eight 1% moves for the year – 1964 was the last time fewer 1% moves occurred in a calendar year. The S&P 500 has long since broken the record for most consecutive days without a 3% pullback and is currently just a few weeks short of the 394-day record without a 5% pullback.
As 2018 unfolds, each company individually will have to decide how to utilize tax relief. Dividends, new hires, new equipment, expanded operations, and acquisitions are possible avenues for corporations. Whether individuals choose to save, invest, or consume also factors largely into the forward view for stock returns.
Internationally, the MSCI EAFE Index generated a U.S. dollar total return of 25% (+16% in local currency), but performance trailed off in the second half as investors priced in worries regarding ECB tapering, political uncertainty, and the strengthening Euro. Finally, led by strong gains in Chinese stocks, the MSCI Emerging Markets Index produced a total return of +37% in 2017.
Janet Yellen will retire in February of 2018 when her term as Chair of the Federal Reserve Board of Governors ends. Jerome Powell, who has already served as a member of the Board for five years, will replace Yellen as the new Chair. Powell has previously stated that the economy does not need additional stimulus, which implies the Fed will continue to raise rates gradually until a neutral Fed funds rate is achieved. Along with the change in leadership at the Fed, there will still be four vacancies to fill on the Board of Governors.
We remain constructive on the global economy and earnings. However, we understand that uncertainty creates volatility which can lead to lower P/E multiples. As Powell takes the helm as the new Fed Chair and the 35-year bull market for bonds comes to an end, Fed policy error risk remains high. Additionally, North Korea, Italian elections, BREXIT negotiations, the ECB, and the BOJ all have the potential to inject uncertainty and, thus, volatility into the capital markets. While we do not advocate an emotionally driven knee jerk reaction to the current landscape, we do promote attentiveness as geopolitical and global market events unfold.
Investment Advisory Services are offered through Virtue Capital Management, LLC, an SEC Registered Investment Advisor. This newsletter is not to give investment advice. Before investing in any advisory product please carefully read the firm’s ADVs before investing. The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. Nothing contained herein constitutes financial, legal, tax, or other advice. These opinions may not fit to your financial status, risk and return preferences. Investment recommendations may change and readers are urged to check with their investment adviser before making any investment decisions. Estimates of future performance are based on assumptions that may not be realized. Past performance is not necessarily indicative of future returns.
Index Definitions: The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. The Russell 1000 is a subset of the Russell 3000 Index. It represents the top companies by market capitalization. The Russell 1000 measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses