Current Thinking

4th Quarter 2017 Economic & Market Review

Economy and the Federal Reserve

Global economic growth continues to improve. U.S. GDP came in at a 3.2% annualized rate for 3Q (information reported in Q4), modestly ahead of the 3.1% annualized rate for 2Q. The readings from the last two quarters of the year were much higher than those reported in the first quarter. As reported last quarter, the economy is in the 8th year of its expansion, the 3rd longest on record. The employment picture remained strong with the unemployment rate at 4.1%, still at cyclical lows, with more than 2 million new jobs created in 2017. The housing market remains solid as existing home sales and prices were both up more than 5% from November to November. The Federal Reserve (the “Fed”), in December, raised the federal funds rate target by 25 basis points to a range of 1.25% – 1.50%; market expectations are for 1-3 additional increases in 2018.

Equity Markets

Global equities surged for yet another quarter and in 2017. Equities continue to be supported by solid economic growth and strong corporate earnings across the globe. Non-US stocks outperformed U.S. stocks for the year, with the MSCI Emerging Markets Index leading the charge (7.4% in Q4, 37.3% in 2017). In addition, the MSCI EAFE Index (representative of developed non-U.S. equity markets) returned 25.0% in 2017 (4.2% for Q4). Meanwhile, domestically, the S&P 500 Index, representing large-cap stocks, returned 21.8% in 2017 with its 6.6% jump in Q4; this marks its 9th consecutive quarter with a positive return and 19th time in the last 20 quarters. Large-cap outperformed its mid- and small-cap counterparts for both the quarter and year as the Russell Midcap Index and the Russell 2000 Index advanced 6.1% and 3.3%, respectively, in Q4 (18.5% and 14.7%, respectively for 2017). Growth outperformed value across the market cap spectrum for all four quarters and by historical margins for the year. For the quarter, Consumer Discretionary, Information Technology, and Financials were the strongest performers, generating gains of 9.9%, 9.0%, and 8.6%, respectively. The Utilities, Health Care, and Telecommunications Services sectors were the poorest relative performers, posting returns of 0.2%, 1.5%, and 3.6%, respectively.

Fixed-Income Markets

US interest rates remain low by historical standards. Interest rates rose for U.S. Treasury securities with one year or less to maturity in 2017, in concert with the Fed’s three interest rate hikes during the year. On the other hand, the yield on the 10-year U.S. Treasury note finished modestly lower than where it began the year. The yield on the 3-month U.S. Treasury bill increased to 1.28% by year-end, up 77 basis points from prior year-end, and the 10-year U.S. Treasury note ended 2017 at 2.40% vs. 2.45% on 12/31/16. For 2017, the Bloomberg Barclays U.S. Aggregate Bond Index (representing investment grade U.S. bonds) gained 3.5% (0.4% for Q4), the Bloomberg Barclays Long Credit Index was up 12.2% (3.2%), and the Bloomberg Barclays U.S. Aggregate Corporate High Yield Index gained 7.5% (0.5%).