Market Reflections for Fourth Quarter 2017

2017 ended on a high note, as global equity markets continued to soar. The U.S. economy has been growing at a healthy pace, reflected by strong earnings-growth data and low unemployment rates. In December, the Federal Reserve raised interest rates by a quarter of a percentage point, as anticipated, and the market reactions were, again, minimal. The new tax bill, which includes a significant reduction in the corporate tax rate, was signed into law just as the year ended. Overall, the robust performance across asset classes and lack of volatility in the financial markets benefited disciplined investors.

2017 Calendar Returns

Returns shown in the chart above are for calendar year 2017. Source: Morningstar®, data as of December 31, 2017.

The S&P 500 Index of U.S. large-cap stocks continued its positive momentum, gaining +21.8% for 2017 (+6.6% for Q4). Small-cap stocks, represented by the Russell 2000 Index, underperformed large-cap stocks, returning +14.6% for the year (+3.3% for Q4). Over the course of 2017, value stocks (Russell 1000 Value Index +13.7%) also underperformed growth stocks (Russell 1000 Growth Index +30.2%). Although this dynamic created headwinds for portfolios tilted towards the small-cap and value segments of the market, having a globally diversified portfolio with exposure to international markets counterbalanced these headwinds.

This year marked the first time since 2012 that international-market equities outperformed U.S. equities. The MSCI EAFE Index, representing international-developed stocks, logged an impressive gain of +25.0% (+4.2% for Q4) in U.S. dollar terms. Emerging-markets stocks posted the strongest performance, with the MSCI Emerging Market Index up +37.3% (+7.4% for Q4) in U.S. dollar terms. A weakening U.S. dollar, relative to most international-developed and emerging-markets currencies, bolstered returns for U.S. investors in overseas markets. After several challenging years of maintaining discipline — in the face of strong U.S. equity-market performance — international diversification truly paid off this year.

On the fixed-income side, the Federal Reserve raised rates three times, which led to a rise in yields at the short end of the curve; 2-year Treasury yields rose from 1.20% to 1.89%. At the longer end of the curve, the 10-year Treasury yield declined slightly from 2.45% to 2.40%. Investment-grade U.S. bonds, represented by the Bloomberg Barclays Aggregate Index, gained +3.5% in 2017 (+0.4% for Q4).

Emerging-markets debt (JPM GBI-EM Global Diversified Index UH) was the biggest winner this year within diversified fixed income, gaining +15.2% for the year and +0.8% for Q4. Credit spreads continued to narrow in 2017, and high-yield bonds (BofAML US HY C Pay BB-B Constd Index) posted a solid +7.0% return (+0.4% for Q4). Municipal bonds (BBgBarc Municipal 1-10Y Blend 1-12Y) declined 0.2% last quarter; this was primarily due to a spike in supply at year end, as many issuers rushed to market in anticipation of the passage of tax reform. Despite this slight pullback in the fourth quarter, municipal bonds returned +3.5% for 2017.

World Asset Classes-Returns-2017

Source: Morningstar®, data as of December 31, 2017.

2017 was a memorable year in many respects — a new administration, continued global political unrest, hurricanes, cryptocurrency fervor and the passage of a sweeping tax bill to cap it off. In the face of all of these uncertainties, the financial markets rewarded investors handsomely. 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!

 

 

U.S. Stock Market: Russell 3000 Index
International-Developed Stocks: MSCI EAFE NR Index
Emerging-Markets Stocks: MSCI EM NR Index
U.S. Bond Market:  Barclays Aggregate Index
Emerging-Markets Bonds: JPM GBI EM Global Divers TR Unhedged

Return data represent past performance and are not indicative of future results. Historical returns of indices do not reflect applicable transaction, management or other applicable fees, the incurrence of which would decrease historical performance results. Index information has been compiled by Hewins from sources Hewins deems reliable, but has not been independently verified. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only. Indices are unmanaged. It is not possible to invest directly into an index. Any charts and graphs represented herein are for informational purposes only and cannot in and of themselves be used to determine which securities to purchase or sell, or when to purchase or sell securities.

Hewins Financial Advisors, LLC d/b/a Wipfli Hewins Investment Advisors, LLC (“Hewins”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. Hewins is a proud affiliate of Wipfli LLP. Information pertaining to Hewins’ advisory operations, services and fees is set forth in Hewins’ current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at www.adviserinfo.sec.gov. The views expressed by the author are the author’s alone and do not necessarily represent the views of Hewins or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Hewins, and Hewins does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Hewins of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional. Hewins does not provide tax, accounting or legal services.
Rafia Hasan
Rafia Hasan

CFA®, CFP® | co-Chief Investment Officer

Rafia Hasan, CFA®, CFP®, is the co-Chief Investment Officer for Hewins Financial Advisors, based in Chicago, IL. Rafia is a member of Hewins' Investment Committee and has a deep knowledge of the financial markets, specifically in the areas of alternative investments and private equity. She also specializes in personal financial planning and estate planning for women investors.

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Market Reflections for Fourth Quarter 2017

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