Despite escalating tensions with North Korea, investors — expecting tax reform — were rewarded in the 4th quarter, and equity markets continued to rally. The 2017 Tax Cut and Jobs Act was initiated by the desire to bring US corporate tax rates in line with foreign developed markets and it should do just that. However, investors should temper their enthusiasm because any positive effects to corporate profits should be modest.
For the year, risk assets continued their stellar performance and, with a total return of 21.8%, the S&P 500 has now completed its ninth consecutive year of gains. Since 1926 this has only happened once — during the 1990s — so equity investors have benefitted from an atypical run. Large cap stocks outperformed last year’s darlings — small caps — with the Russell 2000 advancing 14.6%. International stocks, however, outperformed both. The MSCI EAFE Index gained 25% and the MSCI Emerging Markets Index grew a stellar 37.3%. While growth stocks trounced value stocks, value investors shouldn’t complain, having received double-digit returns.
Oil prices remained at or near $50/barrel for a good part of the year, but continued production cuts from OPEC, coupled with an unexpected fall in US production, led to a late year rally and pushed prices for WTI Oil close to $60/barrel. For the year, oil was up about 12%, but during the last half of the year the gain was closer to 50%.
The Fed did as expected and raised interest rates a ¼ point in December. The market is expecting another two to three hikes next year as well. Through the year the yield curve flattened, with short-term rates rising faster than long-term rates. The 2-year Treasury increased about 70 basis points, closing with a yield just below 2%, while the 30-year Treasury gained about 30 basis points to close yielding just about 3%. High yield closed the year returning roughly 7%. Emerging market bonds easily beat their less volatile counterparts.
The current market environment — low interest rates, benign inflation, solid S&P earnings growth and synchronized global growth — is clearly bullish for equities. As a result, going into 2018, we are optimistic about the near term. However, equity prices, well above their historic averages, reflect this, so we remain cautious.
Look for our upcoming video recapping the year.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Washington Trust Bank.