We close the book on a solid 2017 for U.S. stocks while tipping our caps to a strong start to 2018. Today’s Weekly Market Commentary will provide a high-level performance recap for 2017 that we hope will be helpful for year-end client conversations, in addition to a summary of our equity market views for 2018 following passage of the new tax law.
A Quick Look Back at 2017
2017 was truly a remarkable year for the U.S. stock market with record breaking abound. The S&P 500 Index produced 12 positive monthly returns for the first year ever. The Dow Jones Industrials Average produced 71 record highs—its highest total ever. And the year proved to be one of the least volatile in the history of the VIX Index, with some of the lowest volatility readings ever and without so much as even a 3% pullback, despite significant geopolitical uncertainty worldwide.
The strong year for stocks was driven by several factors but we attribute the gains primarily to the following:
Synchronized global economic expansion. U.S. economic growth picked up some speed as 2017 progressed, helping support gains in U.S. stocks. But equally as important was the breadth of growth globally. As 2017 ended, all Organization for Economic Co-operation and Development (OECD) countries had manufacturing Purchasing Managers’ Indexes over 50 and, impressively, more than 80% of them rose year over year in the latest reported month (November).
Global earnings rebound. The S&P 500 is on track to produce a 10% increase in profits in 2017 based on current consensus estimates from Thomson and FactSet. Technology and emerging market equities were big beneficiaries of earnings-driven gains as each rallied nearly 40% and saw strong earnings increases.
Passage of new tax law. Despite skeptics, President Trump and congressional Republicans delivered tax reform before Christmas. The anticipation, eventual passage, and expected boost to corporate profits from the tax bill all helped stocks cap off their strong year.
Monetary policy support. Inflation remained benign, enabling central banks around the world to maintain a very gradual pace of raising interest rates or tapering securities purchases. Most of the world’s leading central banks are only in the early stages of pulling back while the Bank of Japan is still going full speed.
In terms of what worked, growth outperformed value (largely on technology strength), large caps outperformed small and mid despite greater relevant benefits of lower tax rates for small, and international equities, notably emerging markets, outperformed U.S. equities as the U.S. dollar weakened and global growth accelerated.