Market Review - Fourth Quarter 2017
|INDEX||FOURTH QUARTER RETURN||2017 RETURN|
|BOFA Merrill Lynch 3 Month T-Bill||0.28%||0.85%|
|Barclay's Interm Gov/Credit||-0.20%||2.14%|
|Standard & Poor's 500||6.64%||21.83%|
|Dow Jones Industrial Average||10.96%||28.11%|
|Standard & Poor's 400||6.25%||16.24%|
|Standard & Poor's 600||3.96%||13.23%|
|MSCI EAFE International||3.89%||25.81%|
|MSCI Emerging Mkts||7.50%||37.75%|
Looking back at 2017, few investors predicted the strength the stock market exhibited in the face of many unknowns. Global tensions, policy uncertainty, natural disasters and major data breaches did not derail U.S. stocks. Including dividends, the S&P 500 (proxy for large U.S. companies) posted positive returns for 14 straight months, the longest consecutive streak since 1928. Not only was the absolute return, at 21.83%, impressive; the consistency in which those returns were achieved was surprising. According to University of Rochester finance professor William Schwert, volatility, how the market moves up and down over short periods, was the lowest it has been since 1885.
Small and Mid-size stocks posted double digit returns as well with the S&P 400 (mid-cap) returning 16.24% and the S&P 600 (small-cap stocks) returning 13.23%. Technology stocks had the most electrifying performance advancing almost 40% for 2017.
U.S. markets had a great year, but international stocks, helped by an accelerating global economy, turned in even better results. International equities as measured by the MSCI EAFE gained more than 25% for the year. For a full recap of fourth quarter and 2017 returns by asset class, please refer to the chart above.
The Federal Reserve Bank (Fed) set the stage early in 2017, implying higher rates were on the way. In support of that guidance the Fed raised rates in three separate meetings totaling a .75% increase in short-term rates. Investors took these increases in stride. While short-term rates increased, intermediate and long term rates barely reacted. The yield on the 10 year Treasury bond (a proxy for intermediate bonds) ended the year slightly lower than where it started (2.40% v 2.45%).
As we move into 2018 many factors are present to drive the equity markets higher. Global economies continue to improve. Corporate profits should follow. Major tax reform in the U.S. could provide a significant tailwind. Initial forecasts suggest tax reform alone could add at least a .50% increase in GDP.
The Fed has indicated that reasonable rate hikes are on the horizon based on moderate inflation and steady job growth. Given these indicators, the market should be operating in a relatively low rate environment for at least the first part of the year.
While the outlook for equities remains favorable, gains achieved last year have stretched valuations. Earnings growth in 2018 should bring valuations, as measured by price to earnings ratio (P/E), closer to long-term averages. We would expect to see volatility pick up in 2018. We continue to look for quality companies trading at reasonable valuations that offer a consistent dividend. These types of companies, along with our diversified approach, typically offer some protection during market pullbacks.
As we start a new year, we would like to wish you and your family good health and happiness.
Jason R. Lilly, CFA, CFP®, Chief Wealth Management Services Officer
Michael S. Kiceluk, CFA®, Chief Investment Officer
Edward R. Eastman III, Senior Investment Officer
Lee C. Gatewood, Senior Investment Officer
Kimberly K. Williams, Senior Wealth Management Officer
Robert D. Umbro, Senior Investment Officer
These facts and opinions are provided by the Cape Cod Five Trust and Asset Management Department. The information presented has been compiled from sources believed to be reliable and accurate, but we do not warrant its accuracy or completeness and will not be liable for any loss or damage caused by reliance thereon. Investments are NOT A DEPOSIT, NOT FDIC INSURED, NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY, NOT GUARANTEED BY THE FINANCIAL INSTITUTION, MAY GO DOWN IN VALUE.