2017 was a memorable year in many respects — a new administration, continued global political unrest, new market highs, hurricanes, cryptocurrency fervor and the passage of a sweeping tax bill to cap it off.
In financial markets, 2017 should go down as the year international equities staged a definitive comeback. Emerging-markets stocks surged approximately 37% 1 (in USD terms) with Chinese stocks leading the way, gaining over 50%.2 International-developed market stocks logged an impressive 25%-return3 (in USD terms) on the back of strong corporate earnings and favorable economic data.
This marked the first time since 2012 that international equities outperformed U.S. equities. After several challenging years of maintaining discipline — in the face of strong U.S equity-market performance — international diversification truly paid off in 2017.
Although U.S. stocks lagged international-market stocks, the S&P 500 still posted a stellar ~22%-return.4 This was in large part due to the strength of the technology sector, as “the combined market value of Apple, Alphabet, Microsoft, Amazon and Facebook soared 43% for the year.”5
Source: Morningstar®, preliminary data as of December 31, 2017.
While growth stocks in the U.S. outperformed, small-cap and value stocks were out of favor. The recent underperformance of these segments of the market has further dragged down the five and 10-year performance comparisons, relative to large-cap and growth stocks. For those worrying about high valuations across the spectrum of global asset classes, the value and small-cap segments still appear reasonable, from a relative valuation perspective.
How Did the Prognosticators Fare in 2017?
As we ring in the new year, it is customary to be inundated with forecasts from economists and market strategists. These forecasts should not sway you from your well-diversified, long-term investment philosophy. While the analyses can be interesting, the predictions themselves are highly unreliable — and when we look back, 2017’s forecasts were no exception.
Last January, a group of Wall Street strategists expected that the S&P 500 would gain about 5% for 2017.6 Although the direction of the market movement was correct, the S&P 500 ended the year with a percentage gain nearly four times higher than the group’s prediction.
Wall Street strategists also expected that the Fed would raise rates in 2017, resulting in higher yields in the U.S., compared to other economies, and leading to a stronger dollar.7
The first part of the prediction was only half-wrong; the Fed did raise rates three times in 2017. Although this led to a rise in yields at the short end of the curve (2-year Treasury yields rose from 1.20% to 1.89% over the course of the year), the 10-year Treasury yield declined, contrary to strategists’ predictions. Bond bears be damned — the Bloomberg Barclays Aggregate Bond Index was up a solid 3.5%.8
The second part of the prediction was entirely wrong; the U.S. dollar, as measured by the ICE U.S. Dollar Index, depreciated by 9% for 2017.9 Rather than creating a headwind for U.S. investors in overseas markets, as predicted, the dollar movement ended up buoying international returns for U.S. investors.
Looking Ahead to the New Year
Attempting to make predictions about the market is a loser’s game. This is why we steer clear of crystal-ball gazing and focus instead on principles of diversification — which have proven, time and again, to beat a strategy of trying to predict which stocks will be next year’s winners or chasing a new, speculative trend. With the tailwind of 2017 behind us, let’s make a toast to the great year we have had and resolve to continue staying disciplined in 2018!