Quarterly commentary: January 2018

The fourth quarter of 2017 capped off what turned out to be a strong year for the economy and the markets both here and abroad. Despite hazards from a tumultuous political environment, continued rhetoric from the globe’s bad actors, and a host of natural disasters, U.S. corporate earnings and investor sentiment continued to gain momentum throughout the year, punctuated with a classic December “Santa Claus” rally. Equally notable was the astoundingly low volatility the markets experienced in 2017, as there were only eight days in which the S&P 500 was up or down more than 1%! Going all the way back to 1928, only two years had fewer 1% days: 1964 with three and 1963 with six.

For the quarter, the S&P 500 rose 6.64% and the Russell 2000 Small Cap Index advanced 3.34%. Internationally, the MSCI EAFE Index finished up 4.23% with the MSCI Emerging Markets up 7.44%. Real estate lagged the broader markets with the Dow Jones REIT Index up 1.98%.

The Federal Reserve increased the federal funds rate three times in 2017. Although these rate hikes are a sign of the Fed’s confidence in the continuing economic expansion, they have had a dampening effect on bond prices, primarily on the short end of the yield curve. Despite these rate hikes, the Bloomberg Barclays Aggregate Bond Index gained a modest 0.39% for the quarter.

The economy and the markets seem to be running on all cylinders as we enter 2018, with most key economic indicators looking positive and the stock market rallying so far in January. Equity market performance for the balance of the coming year will most likely be a function of three variables: the sustainability of corporate earnings, inflation, and the pace of interest rate normalization.

The Trump administration closed out its first year in office with the December 20, 2017 passage of what is arguably the largest tax reform bill in our history. According to the Congressional Budget Office (CBO), The Tax Cuts and Jobs Act of 2017 is estimated to cost $1.46 trillion dollars over the next decade. There is little doubt the effects of this bill will provide stimulus to our economy, at least in the short run, which should further fan the flames of our economic expansion. However, if the Fed senses the economy is getting too hot from this added stimulus, it may become more aggressive with its rate increases.

In light of the magnitude of the tax package and the effect it will have on businesses and individuals, we encourage you to read our insights into the bill.