December capped off a very interesting and in many ways unexpected 2017. Us large cap equity indices continued the year-long trend of hitting all-time highs as global indexes continued their rapid ascent. U.S> small cap was negative while midcaps were slightly positive. The Bloomberg Aggregate Bond index was about flat for December and the dollar sagged once again. The biggest surprise, however, would be the late month strength of the CRB commodities index which, after being negative all year, had a very strong December to end the year slightly positive for 2017.
U.S. & International Stock Index Returns
|Index December 2017 Year-to-Date|
|Dow Industrials 1.84% 25.08%|
|S&P 500 0.98% 19.42%|
|S&P 400 (Midcap) 0.07% 14.45%|
|S&P 600 (Small Cap) (0.71%) 11.73%|
|MSCI World 1.70% 21.03%|
|MSCI EAFE 1.52% 21.78%|
|Bloomberg Agg. Bond 3.40%|
|CRB Commodity Index 0.28%|
|US Dollar Index (9.69%)|
All data as of 12/29/2017
There was not much to complain about for the equity investor in 2017 as all the indices we follow ended the year with double-digit positive returns. The move higher can be linked to better corporate earnings, a result of solid growth across the globe, as indicated by JPMorgan’s Guide to the Markets. Yet earnings are only one part of the equation for such impressive equity market returns. In our view there another factor contributing to the outstanding returns achieved in 2017.
The equity investor is once again enthused about investing. Markets work on emotions, particularly fear and greed. Because of the emotional reaction of investors we get markets that soar higher than fundamental analysis would suggest possible and lower lows than logic would dictate.
In the aftermath of the global recession and market collapse in 2008 skepticism persisted among a large swath of the investment community. That distrust of the stock market persisted for many years. It could be seen in the move away from equities as markets moved higher; we saw this when clients were non-believing as the S&P 500 and Dow Industrial Average passed the market highs of March 2000 and October 2007 in 2013; it was evident every time the market indices sold off 5-8% and the call for the next bear market returns.
Today we believe the pessimism of 2008 – 2016 has turned to optimism and worries about keeping up with exceeding expectations.
For 2017 the combination of great fundamentals and investor’s renewed emotional comfort with equity investing gave us a great year of gains.
Bonds had a very interesting yet overall boring 2017. The 10-year Treasury yield edged slightly lower while the Barclays Aggregate Bond Index returned 3.40% for 2017. With The Fed raising short-term lending rates three times and 0.75% this year many had anticipated higher yields for longer duration bonds. Turns out we have had a flattening out of the yield curve with the spread between Treasury maturities dropping to lows not witnessed in 10 years. Setting aside why the curve is flattening, the world’s biggest bond market is sending a signal that traders can’t ignore. The longer the trend continues, “the more likely its effects could spread to bank earnings and the real economy, while at the same time it would limit the Fed’s ability to respond when these risks emerge.”
December capped off a year of weakening for the US dollar against other global currencies. Starting the year around 103 the US dollar index ended the year below 92. Since early 2015 this is about the range the index has trended.
In last month’s analysis we discussed the long sideways trend and the real possibility that the dollar could continue to weaken, eventually breaking below the lower end of the range (just above 100 at the top and 92 the low end). A month ago the chart looked good, suggesting a possible new uptrend was in the makings. In early December the dollar selling continued. Unless we see an immediate turn around we now expect to see a continuation of the downtrend.
It should be noted that a weaker dollar is positive for the earnings of multinational corporations because when they convert overseas profits back into the dollar they receive more dollars, thus more profits. The other side of the coin is it makes imported services and goods less expensive which would likely lead to a larger trade deficit with our trading partners.
After falling early in the month the CRB index we saw a significant upward gain over the final two weeks of trading to end the year slightly positive for 2017. In part this is a result of the indices largest component – oil – showing real strength over the past few months. It should be noted that commodities strength goes beyond just oil with the metals also showing strength.
In a few weeks’ time we will publish our thoughts and concerns on the year ahead. After a strong year for equities – at home and around the globe – we enter 2018 excited with a touch of concern. Why? To paraphrase the great investor Warren Buffet, one should be fearful when others are greedy and greedy when others are fearful. With more greed than fear in the markets today we have a little fear starting to well up inside.
But there’s more to it than just investor sentiment. Inflation, the weak dollar, trade deficits, possible trade wars, possible actual wars … we could go on. The point is, when things feel good, really good, it is time to take stock of the state of the investing world. The change may be coming in 2018, but it might not.
The trend is your friend. Big changes in market direction do not happen very often. The key is not to catch the top or the bottom of a trend but to keep an open mind that change is possible so one can adjust as early as reasonably possible to the new reality. In our forthcoming Stock Market Outlook 2018 we will discuss the investing landscape and what we see for markets over the next twelve months.
On behalf of Magellan Financial we would like to thank you for taking the time out of your busy day to consider our report. If you found this helpful, please forward it on to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
An index is unmanaged and not available for direct investment. Index returns do not reflect the deduction of fees, expenses or taxes. Returns are U.S. dollar based unless indicated otherwise.
Past performance does not guarantee future results and there is no guarantee that any forward looking statements made in this communication will be attained. The indices presented in this communication are to provide you with an understanding of their historic performance and are not presented to illustrate the performance of any security. Investors cannot directly purchase any index
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
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Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
Jeffrey T. Bogert, Partner
Jonathan D. Soden, Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Associate Financial Advisor Jay.Knight@wfafinet.com