The following are excerpts from the 2017 Year-End Review, produced by the Global Investment Management team. Read the full report.
State of the markets address
Another year is in the books, and it was a good one for macro asset classes that posted positive returns almost entirely across the board.
Global stocks, as represented by the MSCI All Country World Index, returned 24.62% in the calendar year, led by international developed markets and emerging economies whose equities were up 25.69% and 37.51%, respectively, according to MSCI data. Though trailing foreign markets, U.S. equity markets also performed spectacularly, ending the year up 21.82% as measured by the S&P 500 Index.
Despite a challenging interest rate environment, bonds also performed admirably. With the 10-year Treasury rate starting the year at 2.45%, many were apprehensive of the Fed’s rate hikes and potential inflation in 2017. However, the market absorbed the rate hikes and inflation continued to be subdued, resulting in a broad bond market return of 4.09%, as measured by the Bloomberg-Barclays U.S. Universal Index. Finally, alternative assets saw divergent returns with the MSCI World Real Estate Index posting a 15.55% return, while the Bloomberg Commodity Index was only up 0.75% despite a late surge in WTI crude oil prices of more than 12% for the year.
The plow horse asset class: equities
Month in and month out, this asset class went to work each day with a smile on its face and minimal drama for the markets. Any investor who continued to employ broad-based equities in their portfolios also had a smile on their face. The S&P 500 Index, as well as the MSCI All Country World Index ex-U.S., saw 12 months of consecutive positive returns in 2017, truly applause-worthy especially this far into the economic recovery. The phenomenon wasn’t just in large companies or developed markets, but there was great consistency in other sub-macro asset classes, including emerging and frontier equities as well as through the capitalization sizes domestically and abroad.
A number of factors contributed to this process. Around the globe there was a synchronization of positive economic activity across a wide range of nations with purchasing managers indices remaining high, while unemployment levels across the G20 continued to fall. Much of the recovery — or at the very least the increase in asset prices — has also been aided by the liquidity and low interest rates provided by central bankers across the globe. The major central banks have been highly accommodative with a surprising absence of inflation. The headline and core versions of the Consumer Price Index and the gauge of Personal Consumption Expenditures, which each measure different forms of inflation, all showed that traction hasn’t picked up enough to violate a central banker’s first mantra: stabilize prices.
2017 called, they want their inflation back
The stage of monetary policy, interest rates, and the returns of the market suggest that 2017 marked a continued move through the middle to upper end of the expansionary phase; however, the one piece of economic data that hasn’t been consistent with this trajectory is inflation. According to the Bureau of Labor Statistics, the end-of-year data for 2017 showed headline CPI at 2.1% and core CPI at 1.8%, a consistent trend as core CPI has averaged between 1.7% and 1.8% in each of the last 8 months.
The Personal Consumer Expenditures Core Index, which averaged 1.5% through November and is the Fed’s preferred indicator of inflation, also has shown feebleness. Collectively, inflation did not show much ability to consistently beat the Fed’s inflation target over the last year. With global growth estimated by the World Bank to come in at 3.1% for 2017, some of the lowest employment across the globe in history, and with the majority of the world’s economies in expansions, we did not see that solid demand make its way into higher prices.
The bottom line
The year was exceptionally positive amongst most asset classes from stocks to bonds and alternative strategies. The markets worked through new monetary policy, fiscal initiatives, the most devastating storm season the U.S. has seen, and major geopolitical events, but still ended up in a goldilocks scenario with increasing growth and subdued inflation. We believe that most of these themes will continue as predictable measures into 2018. Other factors may subside or be replaced by additional drivers of market risk and return. Investors should truly appreciate how rare it is to see an investment landscape like the one witnessed in 2017, with virtually zero volatility, a straight march upward for most asset classes, and the prospect for additional gains heading into the new year.
Read more of the 2017 Year-End Review.
Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
Diversification and asset allocation does not ensure a profit or guarantee against loss.
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