2018 Q1 Market Commentary
Global financial markets continued to move higher, supported by an improving outlook for global economic growth. Volatility remained near record low levels despite persistent geopolitical tensions, tightening U.S. monetary policy and particularly destructive natural disasters. We present a few highlights from 4Q17 below:
- U.S. equity markets continued their bull market run during the fourth quarter as the Trump Administration’s tax reform proposal took a step closer to approval, offering a boost to overall investor sentiment. The S&P 500, the Dow Jones Industrial Average and the technology-heavy Nasdaq Composite each hit all-time highs during the quarter. On the economic front, preliminary estimates indicate third quarter GDP grew at the fastest pace in three years amid strong business investment.
- Developed international equity markets were also positive during the fourth quarter, driven by improving earnings growth and general economic expansion. Strong gains came out of the Pacific region, while Europe lagged. On the political front, British Prime Minister Theresa May suffered a major setback as parliament voted to give lawmakers a final say on any Brexit agreement. In the emerging markets, returns were propelled higher by solid performances from China, India and South Korea. Year-to-date, emerging markets equities are the best performing asset class.
- Within fixed income, results were mixed during the fourth quarter as the Federal Reserve raised interest rates by 25 basis points to a range of 1.25% to 1.50%, the third rate hike in 2017. Investment grade core U.S. fixed income ended the quarter nearly flat, while high yield credit fared marginally better. Municipal bonds edge lower amid a spike of new issuance at year end, while municipal high yield ended the quarter higher. Emerging markets debt was the largest laggard, yet remains the best performer year-to-date.
- Real estate, both in the U.S. and abroad, advanced in the fourth quarter. Similar to the prior quarter, international real estate broadly outpaced U.S. real estate. Commodities returned to negative territory during the quarter and ended 2017 in the red. Weakness among natural gas and several agriculture components, including sugar, wheat and coffee, have weighed on year-to-date results. MLPs were pressured on concerns over distribution growth and tax reform.
An important lesson from 4Q17:
- The fourth quarter and all of 2017 was a good reminder that financial markets and the business cycle often evolve outside the realm of politics. Both in the U.S. and Europe, politics was front and center leading many to wonder if select policy decisions, legislation or elections were enough to derail financial markets. So far, so good, and if tax reform passes it could be positive for the markets. But that passage remains uncertain and that uncertainty could create volatility. As a result, it is more important than ever to remain properly diversified. It is our continued belief that adhering to a well-constructed and diversified investment portfolio anchored to your time horizon and goals remains the prudent course of action.
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