flying high

flying high

4Q17 Market Overview

Investors celebrated the impressive risk rally in 2017 which focused on the improving global economic recovery and rising corporate profit margins. Although U.S. markets are further along in the maturing recovery, International markets finally outpaced U.S. equities with the help of a weakening dollar.

As we look back to March of 2009 when the Dow was at 6,500, it seemed unlikely that the Dow would reach the 26,000 milestone in nine years. At year-end, the U.S. equity recovery boasted a 295% cumulative gain from the market bottom while the International equity recovery clocked in at 127% (see below for a summary of key year-end market characteristics). Although we know we are not immune to another downturn, the questions are when it will occur and how we can take advantage of the positive market momentum in the new year.


20 Year
20 Year
Cumulative Gain
S&P 500
(Source: MSCI, Standard & Poor’s, FactSet, J.P. Morgan Asset Management)

Looking forward into this advanced recovery, we anticipate additional Fed monetary policy tightening and return of market volatility. With each new market record, we will continue to rebalance to target allocations in light of your risk tolerance and cash flow needs. This process typically involves harvesting gains or losses in the most tax-efficient manner possible and then re-allocating the proceeds to out of favor asset classes that offer more attractive long-term opportunities such as international equities and bonds. Our recommendations will be more interesting and challenging in the months ahead as we maneuver around unrealized gains and the new tax law in 2018.

U.S. Equity Markets

The U.S. equity markets extended gains to close out the strong year; the Russell 3000 increased 6.3% for the quarter and fit 21.1% year-to-date return. In a year of unprecedented low volatility and exceptional corporate profitability, U.S. equities rose each month during 2017. Technology and growth oriented companies led the march higher with most sectors finishing the year with returns in excess of 20%. Although most investors are still skeptical of the recovery, economic data continues to surprise on the upside with industrial production, real estate activity and personal income showing modest improvement. Employment gains continue to impress and also give way to future concerns with the unemployment rate nearing 4% and the Fed likely to increase rates another three times in 2018. In the short-term, the reduction in the corporate tax rate to 21% from 35% will help already high and steady corporate profit margins. As companies report their latest earnings, we will focus on guidance related to rising employment and interest related costs to determine how this might impact future profits. These pressures could lead to increased volatility, especially if top line revenue growth doesn’t live up to higher expectations.

International Equity Markets

International developed equity markets continued their solid run with a 4.2% quarter gain and more impressive 25.0% year-to-date return for the MSCI EAFE. After years of disappointment, Europe is in a much more optimal position to build on their 2017 success. In fact, economic growth is now approaching a 2.5% clip and the overall unemployment is trending lower which will put further pressure on the European Central Bank to tighten monetary stimulus measures. Japanese equities finished the year extremely strong as company earnings rose 16% over the past year along with the rise in global trade. Prime Minister Shinzo Abe easily won the snap election in October, providing additional confidence and political stability as Abe’s economic agenda plays out. After China’s economy surprised on the upside by posting an envious 6.9% annualized pace in the first half of 2017, a survey of China’s businesses in December signaled a slowdown in hiring, wage gains and manufacturing orders. With the world’s top economies expanding, emerging markets (MSCI EM) added 7.4% during the quarter to top off an exciting 37.3% annual gain. Both developed and undeveloped international markets continue to look much more attractive from a valuation perspective compared to U.S. equities as we head into¬†the new year.

Fixed Income Markets

Safety-minded investors experienced a modest rebound to close out a relatively positive year; the Barclays Aggregate rose 0.39% for the quarter and 3.54% for the full year. After the Fed raised rates for the third time this year, the 10-year Treasury inched higher to 2.40% on December 30 from 2.33% on September 30. Given the 7 basis point overall yield increase, you would expect a slight reduction in bond returns, however, the results were mixed depending on the duration of the underlying indice since the 20 and 30 year U.S. treasury yields actually edged slightly lower during the quarter. The Barclays US Government Long posted a 2.34% quarter gain, Intermediate 0.40% loss and Short 0.27% loss. In the international fixed-income arena, the JPM Non-US Unhedged advanced 1.6% this quarter and topped off a healthy 9.9% annual return with the added benefit of a softening U.S. dollar. The Barclays Municipal continued their recovery gaining 0.8% and 5.5% for the full year as municipal bonds retained their tax advantage in the final tax plan.