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Quarterly Commentary, Q4 2017

Benchmark Returns for the Period Ended December 2017

Annualized
Quarter 1 Year 5 Year 10 Year
US Treasury Bills (one month) 0.26% 0.80% 0.21% 0.30%
Barclays Capital US Gov’t/Credit Inter Bond -0.20% 2.14% 1.50% 3.32%
Standard & Poor’s 500 6.64% 21.83% 15.79% 8.50%
Russell 1000 Value (large cap value) 5.33% 13.66% 14.04% 7.10%
Russell 2000 (small cap) 3.34% 14.65% 14.12% 8.71%
Morgan Stanley Europe, Australia and Far East (EAFE) 4.23% 25.03% 7.90% 1.94%
Wilshire REIT 1.70% 4.18% 9.35% 7.28%

With the help of a strong fourth quarter, 2017 gave investors a less volatile and record-shattering ride across nearly every major global asset class. This upward momentum can be attributed to a rebounding global economy, strengthening job market, and solid corporate earnings growth on the home front. Consumer spending and strong business investment lifted GDP in the fourth quarter to an estimated 3.20% annualized growth. In December, the Fed raised its benchmark interest rate by 25 basis points. This was their third increase in 2017 and fifth since the Fed started its retreat from the economic stimulus campaign. The probability of another three or four increases in 2018 is high.

Robust performance of 10.96% during the fourth quarter lifted the Dow 28.11% for the year with 71 all-time highs. This was the largest gain since 1995 and the ninth straight monthly gain, which was the longest monthly streak since 1959. The S&P 500 performance was also notable with gains of 6.64% for the quarter and 21.83% for the year. The index in 2017 delivered 62 record highs, twice the gain of 2016, and the strongest yearly performance in four years. Small-cap stocks, as represented by the Russell 2000, experienced a 3.34% gain for the quarter and closed out the year up 14.65%. The tech-heavy Nasdaq enjoyed an impressive 29.64% return for the year. At 1.70% for the quarter and an annual return of 4.18%, U.S. REITs provided the lowest returns among the equity asset classes.

Although lagging slightly behind domestic large-cap stocks in the fourth quarter, emerging markets was the clear victor of 2017. Emerging markets, as represented by the MSCI Emerging Markets Index, posted fourth quarter returns of 7.44% and 37.28% for the year. Other international stocks also enjoyed favorable quarterly and annual returns with the MSCI EAFE gaining 4.23% and 25.03% respectively. This was their best performance since 2009.

2017 was a year that confounded many prognosticators and academics. There was a clear and obvious disconnect between global market returns and the number of unnerving events and situations all over the globe. Undoubtedly, it was a great year to be a passive investor. However, it coincided with a year of political turmoil, threat of nuclear attack, a mature economic recovery, terrorist attacks, quantitative tightening, and devastating hurricanes. Even Richard Thaler, 2017 Nobel Prize winner for his contributions to behavioral economics, is perplexed by the market’s divergent performance. He states, “We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping; I admit to not understanding it.”

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The index returns above assume reinvestment of all distributions. This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale.

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