2017 was an eventful year. The global economy grew healthily; the Federal Reserve (Fed) slowly started to increase interest rates; a major tax bill was signed into law; tensions with North Korea escalated; the Brexit negotiations got underway; and the populist wave in Europe appeared to have slowed with Emmanuel Macron’s election in France. All that may leave you with some questions: What happened in stock and bond markets in 2017, and how did we manage your retirement savings? And how are we going to continue to help you in 2018 on your journey to a more secure retirement?
The U.S. economy continued its long post-Financial Crisis expansion. Unemployment remained low, and economic growth was solid. Companies posted strong earnings, led by the technology sector. Late in the year, a major tax law lowered the corporate-tax rate, meaning that companies will get to keep more of their earnings starting this year.
Yet it wasn’t all smooth sailing, especially on the political front. Tensions with North Korea escalated over the year; a special counsel was appointed to investigate possible Russian interference in the 2016 election; health reform efforts foundered; and there were several devastating hurricanes and wildfires. Even so, U.S. stocks had a remarkable year. The Standard & Poor’s 500, an index of large-cap stocks, rose every month. By the end of the year, it was up by +21.83%.
International stocks fared better still. Developed-market stocks, measured by the MSCI EAFE Index, rose by +25.03%, and emerging-market stocks (MSCI Emerging Markets Index) grew by a whopping +37.28%. A roughly -10% fall in the value of the dollar helped returns to U.S. investors of international stocks, meaning that returns in foreign currencies were magnified when converted into dollars. But other factors were also at play. Growth in the eurozone surpassed forecasts going into the year. While the Brexit negotiations may have dented U.K. economic growth, its effects were isolated. Macron’s victory in the French presidential elections suggested that the populist tide in Europe may have receded for now. Shinzo Abe’s re-election meant that “Abenomics,” credited with boosting the Japanese economy, would continue. Emerging markets seem to have shrugged off the concerns raised immediately following the U.S. presidential election about our domestic trade policy.
Perhaps as remarkable as the stock-market returns over the year was how little volatility accompanied them. A simple measure of stock-market volatility is the number of days that the S&P 500 moved by more than +/- 1%. In 2017, there were only eight such days — very low by historical standards. In contrast, there were 48 in 2016.
Bonds had a much more subdued year. The Fed started to cautiously bring interest rates back toward historical levels, raising rates three times. Short-term rates, which the Fed has a strong influence over, rose in response. The three-month Treasury bond rate rose from 0.53% to 1.39% over the year. Long-term rates fell slightly, affected less by the Fed than by expectations of inflation and growth, with the 10-year rate falling from 2.45% to 2.40%. Most bond funds hold bonds that span a range of maturities. The Bloomberg Barclays Aggregate Index, a broad bond index, rose by +3.54% for the year.
How we managed your portfolio in 2017.
Our Portfolio Management team watches the markets and your investment options. We review your portfolio each month to ensure it’s still appropriate. If the markets or your investment options change significantly, or if your situation or appetite for risk is different, we’ll buy and sell among the funds your employer offers to adjust your portfolio to where it needs to be.
In hindsight, we can see that the best-performing asset class in 2017 was emerging-market stocks, with an impressive return of +37.28%. Of course, as investors, we don’t have the benefit of hindsight in deciding where to invest for the future. The better approach is to ask, “Given what we know at any moment, what’s the best portfolio allocation to reach long-term growth for your situation and your preferences for risk?” After all, market sentiment can shift dramatically and unexpectedly.
Instead of trying to time market events, we take a disciplined approach to managing your investments. We build personalized and diversified portfolios appropriate for your goals and risk tolerance. This is because different asset classes do well at different times. For example, developed-market international stocks outperformed domestic large caps in the first three quarters of the year, but underperformed them in the final quarter. And asset classes can perform poorly for extended periods of time — sometimes for several years — before performing strongly. We’ve seen this with international developed-market stocks, last year’s laggard and a leader this year. Having exposure to a broad set of asset classes means you’ll never do as well as the best-performing asset class. For instance, emerging-market stocks likely performed better than your overall portfolio during the year. But you’ll always do better than the worst-performing asset class. For 2017, that was short-term bonds. By balancing your exposure to different asset classes, we can gain higher expected returns while taking a reasonable amount of risk over the long run.
The same investing principle holds true for 2018. We begin a year that has considerable economic and political uncertainty. Will geopolitical tensions escalate? Will a continued partisanship in Washington lead to a government shutdown? Will strong global economic growth continue? As such, it’s still important to have a portfolio without excessive exposure to any particular asset class and its associated risks.
Remember, too, that risk can be positive as well as negative for markets. Despite pessimistic predictions for markets following Brexit and the election of President Trump, stock markets around the world soared in 2017. Had you sat on the sidelines, you’d have lost out on a great year in the markets. Also, keep in mind that stock prices respond to how events turn out compared to what’s expected. In 2017, European stocks fared very well in part because economic growth beat modest expectations. Some of the biggest positive stock-market moves happen in times of economic stress. That’s because what happens doesn’t always meet the dire forecasts.
Building a diversified portfolio that’s right for your preferences and financial circumstances can be a complex task. The more you tell us about your goals, other assets, and preferences, the better we can tailor an investment strategy to meet your needs. If you have questions about your portfolio, feel free to call one of our advisors to learn more. May your 2018 be a prosperous and happy year for you and your family.