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.
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.
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.
