Note: This post is an excerpt from Gould Asset Management’s Economic and Market Review for the Fourth Quarter of 2017. The excerpt is posted here for the benefit of our blog subscribers.
US Stocks Surge Higher as Tax Reform Passes, Capping Stellar 2017
US stocks put an exclamation point on an already strong year, as markets rallied around the prospect of cuts to corporate and personal tax rates. The S&P 500 rose 6.6% in the fourth quarter to finish the year up a remarkable 21.8%. The reduction in the corporate tax rate to 21% served as the centerpiece of the tax reform bill, and investors expect this will boost after-tax earnings of US companies going forward. Good economic growth and an uptick in corporate profitability also contributed to the strong quarter.
The financial and technology sectors posted the largest gains in the fourth quarter, rising 8.6% and 8.5% respectively on the period. Technology’s nearly 35% rise in 2017 was a top story, but the market rally was relatively broad-based, with consumer discretionary, materials, industrials, financials, and healthcare all rising over 20% on the year. As a whole, US stocks posted positive returns in every single month in 2017, the first time this has happened since 1958.
Mid and small cap US stocks modestly underperformed large caps on the quarter as well as on the year, rising 4.8% in the fourth quarter, and 17.8% for the year as measured by the Wilshire 4500 stock index. Historically, small and mid cap stocks have proven more volatile than large caps and offered somewhat higher returns to compensate, although that hasn’t been the case over the past five years. Over 10 and 15-year periods, however, smaller companies still maintain a performance edge, suggesting investors would be wise to maintain allocations to both asset classes.
Market volatility remained subdued in the fourth quarter and was a key theme throughout 2017. The VIX volatility index mostly hovered between 9 and 11 throughout the quarter, far below its long term historical average of 20. VIX closed at its lowest level ever (9.14) on November 3rd. This was remarkable considering the quarter saw a rate hike by the Fed, tax reform debated and passed by Congress, and continued tensions with North Korea.
International Stocks Rise, Outpace US Stocks in 2017
International developed markets stocks capped a strong 2017 with a solid 4.3% return in the fourth quarter, as measured by the MSCI EAFE index. For the year-to-date, international developed stocks have risen a robust 25.6%, as the world economy continues to improve and Eurozone growth accelerates amid accommodative monetary policy. The US dollar remained weak, declining 0.4% on the period, contributing to international stock gains. For the year, the US dollar fell 7.1% against a global basket of currencies.
Emerging markets were among the best performing asset classes on the quarter (up 7.5%) and the year (up 37.8%), as measured by the MSCI Emerging Markets index. Fourth quarter gains were supported by a variety of political developments, which included a Greek agreement with international creditors, plans by India to recapitalize state-controlled banks, and a South African election that saw pro-reform candidate, Cyril Ramaphosa, elected leader of the African National Congress. Chinese stocks, a major component of emerging markets returns, gained 7.6% for the period and more than 50% on the year.
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