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Equities Strong in 2017

Equities Enjoy Strong 2017

  • 01.02.18
  • Markets & Investing
  • Article

The end of 2017 brings to a close one of the best years for global equity markets in nearly a decade. The S&P 500 set repeated records and gained a whopping 19.42% for the year, only to be outperformed slightly by international developed markets and emerging markets. Overall, large caps outperformed small, and growth outperformed value.

Looking to 2018, the equity markets remain bullish, according to Raymond James Senior Research Associate Andrew Adams, with any early year weakness representing the first real buying opportunity since before the 2016 U.S. presidential election.

Despite a rising interest rate environment in the United States, core fixed income also posted a positive return for the year, taking in stride three increases in the federal funds rate that raised the target range to 1.25% to 1.50%.

The positive returns produced across major asset classes, as reflected in the chart below, made 2017 a good year to be an investor.

 

12/30/16 Close

12/29/17 Close

Change YTD

% Gain/Loss YTD

DJIA

19,762.60

 24,719.22

+4,956.62

+25.08%

NASDAQ

 5,383.13

 6,903.39

+1,520.26

+28.24%

S&P 500

 2,238.83

 2,673.61

+434.78

+19.42%

MSCI EAFE

1,684.00

 2,050.79

+366.79

+21.78%

Russell 2000

1,357.13

 1,535.51

+178.38

+13.14%

Bloomberg Barclays U.S. Aggregate Bond Index

 1,976.37

 2,046.37

+70.00

+3.54%

Performance reflects price returns as of 4:30 EDT on Dec. 29, 2017.

Here’s a look at what else is going on in the economy and capital markets, as well as key factors we are watching:

Economy

  • Late additions to the tax law passed in late December, which reduced corporate taxes, among other things, should add a little growth to the GDP in 2018. The law is less likely, however, to produce long-term growth, according to Chief Economist Scott Brown.
  • Economic growth will face headwinds from a tight job market and slow labor force growth, but an increase in wages over time could lead labor to become more efficient.
  • The Federal Reserve’s transition in leadership early in 2018 is expected to be smooth. The outlook for monetary policy, however, could become cloudy in the second half of the year, when policy errors could carry greater risks.
  • We believe the Fed will maintain its gradual and data-driven approach to raising interest rates, with the expectation of two increases to the federal funds rate for 2018. Depending on the data, however, the Fed could opt for more or fewer increases.

Equities

  • Conditions support a positive outlook for 2018: improving global economies and corporate earnings, as well as stable inflation levels and interest rates, according to Asset Management Services Chief Portfolio Strategist Nick Lacy.
  • “If you look at the pillars of support, and if you back that up with technical support, you can’t come up with any case where this market is going to roll over any time soon,” Director of Equity Portfolio & Technical Strategy Mike Gibbs said.
  • Energy stocks mostly lagged oil prices in 2017, but Senior Vice President of Equity Research Pavel Molchanov expects it to reverse in 2018; he envisions upside for both, with the equities outperforming the commodity.
  • Typically, investors will experience three bull markets in their lifetimes, Chief Investment Strategist Jeff Saut reminds us. Consider whether the current one presents an opportunity for you to accumulate wealth.

International

  • Despite German Chancellor Angela Merkel’s inability to yet form a new majority government, European optimism rose to multi-year highs during December, helped by economic growth uplifts and an improving tone to the Brexit debate talks, which have moved to a second, more detailed stage.
  • The Chinese economy and its currency, the yuan, were surprisingly resilient during 2017, and the announcement of a new round of anticorruption initiatives to accompany ongoing economic reform measures continues to show leadership’s commitment to change.
  • While emerging market assets pulled back somewhat during December, overall it was a positive year. Further progress can be made in 2018 if global trade markets remain fluid and the dollar does not bounce aggressively, according to European Strategist Chris Bailey.

Fixed Income

  • The outlook for U.S. fixed income remains obscured by economic and political uncertainty, according to Senior Fixed Income Strategist Doug Drabik.
  • Among the forces at play will be tax legislation, Federal Reserve personnel changes, the global economy and central bank policy.
  • Though challenged to contribute to total return in a rising interest rate environment, fixed income plays an important diversification role for its ability to mitigate the risk of equities.

Bottom Line

  • Looking to 2018, the equity markets remain bullish, with any volatility representing the first real buying opportunity for more than a year.
  • The 2018 outlook for fixed income markets is uncertain, with economic and political factors likely to play key roles in the coming months.

Your advisor will continue to watch for legislative updates, particularly in regard to tax reform, as well as economic developments. In the meantime, please reach out to him or her if you have any questions.

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc., and are subject to change. Past performance is not an indication of future results and there is no assurance that any of the forecasts mentioned will occur. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Small and mid-cap securities generally involve greater risks. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. The performance noted does not include fees or charges, which would reduce an investor's returns. Asset allocation and diversification do not guarantee a profit nor protect against a loss. Debt securities are subject to credit risk. A downgrade in an issuer’s credit rating or other adverse news about an issuer can reduce the market value of that issuer’s securities. When interest rates rise, the market value of these bonds will decline, and vice versa. While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, state or local taxes. Chris Bailey is with Raymond James Euro Equities, an affiliate of Raymond James & Associates, and Raymond James Financial Services.

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