2017 Year in Review: Follow the Fundamentals
December 27, 2017 |
2017 will be a year that will likely be remembered for strong returns and an extraordinary lack of market volatility. Despite the day-to-day news flow on health care, tax reform, political uncertainty, and elevated market valuations, investors largely shrugged off these concerns and asset classes rose based upon supportive fundamental growth and strong corporate earnings. In the last market reflection of 2017, we will discuss what we believe were some of the most important stories of the year.
1) Asset class returns were strong
2017 performance has been mostly positive across asset classes. This performance was driven by several factors: GDP growth, both in the US and overseas, has been positive and accelerating. Jobs and wages have grown in the US throughout 2017. Federal Reserve rate hikes have been measured and well communicated in the US and monetary policy remains mostly stimulative outside the US. Global interest rates have remained relatively low and inflation has been controlled in most major markets. Tax reform that aims to significantly reduce the corporate tax rate has passed the House and Senate. Lastly, corporate earnings have grown at double-digit rates in 2017 and expectations for continued growth have propelled markets across the globe. As a result, US stock markets were strong again in 2017 while international markets had a significant rebound after several years of underperformance. The below chart reflects the performance of several of the Gradient investment portfolios across the risk spectrum. The data shows that investors had largely positive returns and were generally rewarded for taking a risk in their investment allocations.
2) Volatility was historically low
By several different measurements, 2017 markets have had strong returns with extremely low volatility. Credit spreads, the premium paid to take on risk in bond markets, are near 10-year lows. The CBOE Volatility Index (VIX), a measurement of stock market volatility, is at levels that rank near the lowest in its history. Lastly, the below chart reflects annual returns (blue bar) and maximum drawdown (red dot) of the S&P 500. In 2017, the maximum intra-year decline has been 3%. This low level of decline is rare as it has only happened one other time in the past 25 years.
3) The rise of cryptocurrency
We would be remiss in not mentioning the rise of cryptocurrencies like Bitcoin, Ethereum, Litecoin, and dozens of others which have had dramatic price increases during the year. These price movements have created a flurry of questions, and no shortage of opinions, regarding the future value and utility of cryptocurrencies and the underlying blockchain technology. Speculation in the cryptocurrency market has been widespread, and the “fear of missing out” has driven the conversation to the mainstream. We believe the underlying technology has promise but prefer to be cautious until the industry is more established and investable.
In closing, we began the year constructive on the markets based upon our analysis of the fundamentals. We communicated our favorable view on international markets and launched the G40i to give investors the ability to take advantage of this opportunity. As we end the year, global economic and market fundamentals were strong in 2017, and market prices followed the fundamentals to higher levels throughout the year. Volatility was historically low but should be looked at as an exception rather than the rule. As we look to 2018, there will be many of the same questions, and several new ones, that will test the resiliency the markets have experienced as of late. Our role at Gradient is to navigate through the noise and concentrate on the fundamentals to determine the opportunities and risks in the investment markets.
*Please look for Wayne Schmidt’s January Market Commentary for the Gradient Investments 2018 market expectations*