January 6, 2018

Data Source: Bloomberg

4Q2017 Highlights:

  • Global investors were in a festive mood as global equity markets (MSCI ACWI) rallied 5.5% led by Japan and emerging markets with Europe lagging major regions. The S&P 500 rallied 6.6% led by smaller caps and value stocks, primarily due to the prospects of these two segments benefiting more from tax reform legislation.
  • U.S. shoppers were also feeling especially festive this year as Mastercard reported north of $800 billion in seasonal spending (“more than ever before”). Beaten-up retail stocks caught a bid following reports of strong holiday shopping that lifted all retail boats (and not just Amazon).
  • This quarter also witnessed the spectacular ascent of cryptocurrencies, especially bitcoin which rose from $1,000 at the beginning of the year to a peak of $19,000 and then dropping to $12,000.
  • Commodities performed well (up 9.9%) as oil prices rallied to the $60/barrel range from upper $40/barrel. 
  • Yield-sensitive sectors like REITs and utilities were laggards as were High Dividend and Low Volatility factor strategies.
  • The 10-Year Treasury Yield rose ~0.10% from the beginning of the quarter following passage of tax reform legislation and increased confidence that the Federal Reserve would tighten short-term rates further in 2018 and 2019.
  • High yield credit spreads widened, albeit off 2-year narrow levels, while investment grade spreads remained flat. The tax legislation capped how much interest expense could be deducted by corporate taxpayers, which could put more pressure on highly leveraged borrowers.

YTD 2017 Highlights:

  • Global markets performed strongly for the year with MSCI All-Country World Index (ACWI) returning 24% led by emerging markets and Asia-Pacific regions, returning 37.3% and 37.0%, respectively. Europe and Japan also performed well, returning 25.5% and 24.0%, respectively, all outperforming the S&P 500 which returned 21.8%.
  • USD weakness drove a good portion of the outperformance of international markets over the U.S. The dollar spot index (DXY) was down almost 10% for the year.
  • Within the U.S., investors expressed a clear preference for growth stocks over value and dividend-focused stocks. S&P Pure Growth returned 26.8% vs 17.7% for Pure Value.
  • Despite a strong year for U.S. equities, it was driven by a narrow group of stocks and sectors. S&P Small Caps returned 13.2%, well below the S&P 500 return of 21.8%. The technology sector handily outperformed the other major sectors, returning 38.8% for the year. Energy and telecom made up the bottom, posting slightly negative returns for the year.
  • Fixed income credit risk was also rewarded in 2017 with Barclays US High Yield Index returning 7.5% and Barclays Emerging Market Local Currency Index returning 15.6%. The more conservative Barclays Aggregate Bond Index returned 3.5%. The 10-Year U.S. Treasury Yield ended the year right where it began in the 2.40-2.45% range.
  • Equity alternative assets performed well but couldn’t keep up with the broader market. S&P GSCI Commodities return 5.8%, but saw year-end strength with oil prices reaching $60/barrel. Dow Jones REIT Index returned 8.7% and S&P GSCI Precious Metals returned 12.0%.
  • Among factor-based strategies, U.S. MSCI momentum performed well ahead of the other major strategies, returning 35.8% versus 25.3% for Quality, 20.1% for Low Volatility, 18.4% for value, and 15.9% for High Dividend.
  • From a macro regime perspective, 2017 largely played out as expected– signs of cyclical reflation emerging worldwide throughout the year. However, investors still pursued the ‘New Normal’ playbook of chasing scarce growth and yield while ignoring value.
  • Heading into 2018, investors need to question if they are being properly compensated for taking on emerging market risk; whether highly leveraged equity, sovereign debt, or local currency. The long-run growth story for emerging markets remains intact, but we may see some hiccups come 2018, especially with a tightening U.S. Federal Reserve serving as the backdrop.
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