Fourth Quarter Market Review

What a year 2017 ended up being for investors. In the past week several investment strategists have stated 2017 might go down in history as being a “perfect” year for global equity markets.  Markets were “perfect” in the sense that investors experienced an incredibly smooth ride to strong returns with historic levels of low volatility.

In the US, large caps outperformed small caps as several technology names, including the FAANGs (Facebook, Amazon, Apple, Netflix, and Google), performed extremely well.  Along with the solid results from the technology sector, the market was lifted by strong results in the industrial, materials, and financial sectors, helping to propel the Dow Jones, S&P 500, and Nasdaq to new highs. In fact, investors never experienced more than a 3% pullback in the markets at any point in the year, compared to an average intra-year decline of 14% over the past 40 years according to JP Morgan.  Low levels of volatility make it much easier for investors to stay the course, and make it a more comfortable and enjoyable ride.

Although domestic markets did very well on an absolute basis—the S&P 500 was up over 21% and global equities were up almost 24%, the come back story of 2017 was the strong rebound in overseas markets. Emerging and developed international equities rose 37% and 25% respectively—topping US markets for the first time in 5 years—as increased economic activity abroad, coupled with a weakened US dollar helped support higher valuations. Despite starting the year strong, the US Dollar index declined almost 10% in 2017, its biggest annual slide in almost 15 years. Cash and commodities were the worst performers for yet another year.

Fixed income markets posted positive returns in the face of several rate hikes from the Federal Reserve.  Although US 10-Year Treasury yields dipped to a low of 2.07% in September, the benchmark rate ended 2017 where it started, at a flat 2.4%.  Relative to the rest of the world, US interest rates and bond yields still look attractive, with yields on UK debt unchanged at 1.2%, German bunds up to 0.4%, while Japanese debt yields are close to zero.

Once again the Federal Reserve telegraphed a December rate hike and has indicated two or three additional rate increases for 2018.  This may be necessary as inflation creeps upward, wages increase, and full employment is reached. It’s been said that markets don’t die of old age; they usually decline due to unwarranted monetary policy decisions or unanticipated inflationary concerns, all valid in this rate hiking cycle.

We continue to be encouraged by a range of positive economic data such as strong consumer confidence figures and rising earnings expectations, which point to a bright financial start to 2018.  Global growth is accelerating and macroeconomic policy is still accommodative in most parts of the world.  At the same time, we appreciate the favorable low volatility environment that we’ve all enjoyed, but realize it can’t last forever. With this in mind, we continue to believe globally diversified portfolios will provide ballast and opportunity when market volatility returns.


Important Note: This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. The material presented here has been obtained from sources believed to be reliable.  Madison cannot guarantee the accuracy or completion of this information.  Madison Wealth Management does not provide tax, legal or accounting advice. © Madison Wealth Management 2018