Heading into 2017, many analysts were predicting a modest year for investors. Fresh off the end of 2016 where stocks rallied strong in the fourth quarter to finish up almost 12% (S&P 500) for the year, both Credit Suisse and Goldman Sachs were predicting an S&P 500 return for 2018 of less than 3%. Further, many analysts were also predicting a rough ride for the bond market, where it was widely believed that rising interest rates would cause most bond returns to be flat or negative for the year. The S&P 500 posted a total return of 21.31% for 2018, its best year since 2013. And, although the Fed (FOMC committee) raised short-term interest rates three times in 2017, the long end of the interest rate yield curve (as indicated by the 10 Year US Treasury Rate) actually declined slightly during 2018, starting the year at 2.45% and finishing 2018 at 2.40%. The US Bloomberg Barclays Aggregate Bond Index finished 2017 with a respectable 3.54% return. If the last two years have taught us anything, it is that forecasting elections or market returns is a fool’s errand.
One thing that was steady throughout 2017 was record low volatility. The S&P 500 did not have a single month of negative returns. In fact, you have to go back to October 2016 for the last negative month, a win streak of 14 consecutive months, the longest in history. Also, the magnitude of daily moves in the market was also much less than normal. Not a single day in 2017 did the market move up or down by 2% or more. Finally, the average largest intra-year decline of the S&P 500 (meaning the largest draw down during the year from a high to a low point) is close to 16%. It was only 2.8% in 2017. All those investors waiting for the big pullback in 2017 found themselves still waiting at year end.
As mentioned above, Large Cap US (S&P 500) was up 21.31%, for 2017, Mid Cap US (S&P Midcap 400) was up 16.24%, Small Cap US (Russell 2000) was up 14.65%, Developed International (MSCI EAFE) was up 25.03% and Emerging Markets (MSCI Emerging Mkt) was up 37.28%. Any year where all equity indices are up double digits is a great year for investors.
Value vs Growth and Sectors
Unlike 2016 where value stocks did better than growth stocks, 2017 was clearly a year for growth stocks with the S&P 500 Growth index up 27.44% while the S&P 500 Value index (mainly your dividend payers) was up 15.36%. The top performing sectors, not surprisingly were the growth sectors, with Technology leading the way up 39%, Consumer Discretionary was up 23%, Materials were up 23%, Financials were up 22%, Healthcare was up 22% and Industrials were up 22%. The sectors that lagged the benchmark for 2017 were Consumer Staples up 13%, Utilities up 12%, Real Estate up 10%, and the only two negative sectors for the year were Energy and Telecom which were both negative at -1%.
Going into 2018, we are cautiously optimistic. While we see the possibility of another 20% return from the stock market in 2018 as unlikely, most of the economic indicators are still positive: low unemployment, low interest rates, low inflation and once again, as in 2017, it is widely expected that most of the world’s economies will be expanding in 2018. This coupled with the potential positive economic gains in the US from the recent tax reform bodes well for another positive market in 2018. We would expect there to be more volatility in 2018. As always, there are some geo-political potential headwinds, mainly in North Korea and Iran, which could upset things in 2018, but barring either one of those situations escalating or something unforeseen as of this writing, the table is set for what could be another decent year in 2018.
Tom Reynolds, CPA & Matt Reynolds CPA, CFP®
Gordon Shearer Jr., CFP®
Francis C. Thomas CPA, PFS
Jeff Hilliard, CFP®, CRPC
Robert T. Martin, CFA, CFP®
(This article is for informational and educational purposes only and should not be relied upon as the basis for an investment decision. Consult your financial adviser, as well as your tax and/or legal advisers, regarding your personal circumstances before making investment decisions.)