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Week in Review

Week Ending: Friday, December 29, 2017

Recap & Commentary

Looking back, as we close the book on 2017, perhaps the biggest surprise of the year wasn’t any singular event, but rather the market’s indomitable determination to move higher despite concerns about valuations, the threat of rising interest rates, U.S. political drama, and geopolitical events. The near absence of volatility was also notable.

With the S&P 500 posting a positive return in December, 2017 became the first year in the S&P 500’s long history in which the index posted positive returns for every calendar month of a given year. 2017 also marked the 9th consecutive year of positive returns for the S&P 500, matching the record set from 1991-1999. The Dow Jones Industrial Average tacked on over 5,000 points in 2017, the largest-ever point gain in a calendar year, though not its largest percentage gain.

As good as U.S. equity market returns were, international market returns were even better. A synchronized global recovery, country-level idiosyncratic factors, and a weaker U.S. dollar led to the first year since 2012 in which international markets outperformed the U.S. markets (S&P 500) and the best year for international markets (developed and emerging) since 2009.

For all the strength seen in 2017, there was still significant return dispersion. At the sector level, Tech generated the strongest returns at 37%, while Telecom fell –6%. At the individual level, 147 stocks within the S&P 500 gained at least 30%, while a full 25% of stocks (125 companies) within the index posted a negative return.

Despite the fear of rising interest rates, the yield on the 10-Year Treasury ended the year essentially unchanged. From point-to-point, the 10-Year yield actually fell –0.03% from 2.44% to 2.41%. However, over the course of the year, it did experience significant volatility rising as high as high as 2.63% and falling as low as 2.04%. Entering 2018, the general expectation, once again, is that rates will rise.

Regarding global monetary policy, 2017 will likely to be remembered as an inflection point, as it marked a year in which major central banks took steps to normalize policy or signaled their intentions to do so moving forward. That was highlighted by the Fed’s third rate hike of 2017 following its December meeting and its decision in October to begin reducing its balance sheet.

Economic Bullet Points

Strength in home price growth, as measured by the Case-Shiller Home Price Index, was one of the biggest economic stories of 2017. October’s sharp 0.7% gain followed an upwardly revised 1.0% increase in September, bringing the Y/Y rate to 6.4% - the best Y/Y growth rate since July 2014. All 20 cities within the index posted positive gains. Restrained supply of available homes on the market is certainly a factor helping to lift prices, as well as a general acceleration in housing demand.

Uncertainty surrounding the tax reform bill weighed on Consumer Confidence in December - the cutoff for the survey was December 15, when the bill was still very much in flux. After posting back-to-back 17-year highs, the index cooled slightly in the month to 122.1. The pullback was largely due to a decline in the expectations component, where uncertainty weighed on consumer expectations. Even at their December level, however, expectations for future business conditions remain relatively high. Another important positive is the assessment of the current jobs market, which improved from already strong numbers in the prior two months.

Of Note

From all of us here at First Western Trust, we wish you a happy, healthy, and prosperous new year. Happy 2018!

Market Indices Week of 12/29

S&P 500                  -0.4%

Russell 2000            -0.5%

MSCI EAFE              0.9%

MSCI EM                  1.5%

Commodities            2.9%

Barclay’s Agg.           0.5%

US Dollar Index        -1.6%

10-Yr Yield                2.41%

Oil ($/bl)                    $60

Gold ($/oz)               $1,291

The Week Ahead

  • ISM Manufacturing Index
  • Factory Orders
  • ISM Non-Mfg. Index
  • Construction Spending
  • International Trade
  • Jobless Claims
  • Employment Situation
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