A Year Like No Other
As we reflect on 2017, it is tempting to focus on events that probably had little impact on the markets or the global economy – because it really was a year like no other.
In the past 12 months, we faced new nuclear fears from North Korea; debated whether NFL players should take a knee during the national anthem; experienced the largest security breach in history; tempted fate by looking at the sun during the total solar eclipse; witnessed countless allegations of sexual misconduct in Hollywood, Congress and around the world; watched the meteoric rise of the cultural phenomenon called #MeToo; mourned the deadliest mass shooting in modern US history; regrouped after one of the most devastating and costly hurricane seasons ever; watched hopelessly as California burned; learned to weave the term “fake news” into our every-day conversations; and were perplexed at this new thing called Bitcoin.
Now, let’s talk about how the markets around the globe performed – because it really was a year like no other.
At 30,000 Feet: It Was a Great Year
- NASDAQ ended the year 28% higher – its best year since 2013;
- The Dow Jones Industrial Average ended the year 25% higher – its best year since 2013;
- The S&P 500 ended the year 19% higher – its best year since 2013;
- At nearly nine years old, the bull market is now the second-oldest and second-strongest in history.
Further dissecting the performance of the eleven S&P 500 sectors, we found that:
- The top performer for the year was Technology, up 38.8%;
- Materials jumped almost 24%; followed closely by Consumer Discretionary, which gained 23%; Financials up 22.2% and Healthcare up 22.1%;
- Energy and Telecommunications were both down, losing 1% and 1.3%, respectively.
Emerging Markets Soar in 2017
While 2017 was a great year for U.S. stocks, international and emerging market investors did even better. Europe was up 27%; the Pacific region advanced 28.9%; and emerging markets surged 37.4%. Even Japan was better with a 24.3% gain. But wait, there’s more:
- Argentina's Merval Index surged 77% this year;
- The Nigerian All-Share Index was up 42%;
- Turkey’s benchmark Index rallied 48%; and
- Hong Kong’s Hang Seng Index rose 36%.
Record Low Unemployment
The number of Americans filing for unemployment benefits point to a tightening labor market, certainly a helpful ingredient to the stock market’s 2017 performance. At the very end of the year, U.S. workers filed 245,000 initial claims for unemployment benefits and since mid-October, claims were confined to a range of 223,000 to 252,000.
That last week in December marked the 147th straight week that claims remained below that important 300,000 threshold, which is associated with a strong labor market. That is the longest such stretch since 1970 and important because at that level, economists consider the labor market to register “full employment.” The jobless rate is at a 17-year low of 4.1 percent.
Consumer Confidence & Spending
In September, U.S. consumer spending recorded its biggest increase in more than 8 years. The Commerce Department reported that consumer spending – which accounts for 2/3 of U.S. economic activity – jumped 1%. Further, consumer confidence reached a 17-year high in November, although it dipped slightly in December.
Tax Cuts and Jobs Act
Early in the morning of December 20, 2017, the Senate passed the "Tax Cuts and Jobs Act" by a party-line vote of 51 to 48; (Republican Senator McCain was absent for medical reasons). Irrespective of your political leaning, this legislative achievement was the most sweeping overhaul of the U.S. tax system in more than 30 years.
By almost all accounts, the Tax Cuts and Jobs Act is predicted to raise the federal deficit by billions of dollars – and perhaps as much as $2 trillion over the next 10 years. The big question is how much economic growth the new bill will create, thereby offsetting the increase to the federal deficit.
Here is a very quick summary of other provisions of the tax bill:
- The bill creates a single corporate tax rate of 21%, beginning in 2018, and repeals the corporate alternative minimum tax.
- The bill retains the current structure of seven individual income tax brackets, but in most cases, it would lower the rates.
- The bill raises the standard deduction to $24,000 for married couples filing in 2018 (from $13,000 under current law), to $12,000 for single filers (from $6,500), and to $18,000 for heads of household (from $9,550).
- The bill ends the individual mandate, a provision of "Obamacare" that provides tax penalties for individuals who do not obtain health insurance coverage, in 2019. While the mandate will technically remain in place, the penalty would fall to $0.
- The bill temporarily raises the child tax credit to $2,000, with the first $1,400 refundable, and create a non-refundable $500 credit for non-child dependents.
- The bill caps the deduction for state and local taxes at $10,000 through 2025.
What’s in Store for 2018?
Now, let’s tackle the question on everyone’s mind: will 2018 continue to reward investors with big stock market gains? Or will we slide backwards?. Well, that depends entirely on who you ask.
So, I’ll leave you with this: according to Bloomberg, a year ago when asked to predict what 2017 might look like, not a single strategist at the top 18 banks saw the markets rising as much as they did. In fact, among those 18 strategists, the average gain predicted was 5.5% and the biggest bull thought the market would gain 12%.
So, I’ll suggest that we all reflect favorably on the markets performance during 2017 and make sure we’re fully prepared for the coming year.