January 12, 2018
The fourth quarter of 2017 was jam-packed with activity — both in the market and the economy. Highlights include:
- Failed additional attempts at repealing the Affordable Care Act
- Passage of the Tax Cuts & Jobs Act of 2017
- Expanding GDP, falling unemployment, and low inflation
- Beginning of the end of the Federal Reserve’s Quantitative Easing program
Equities. In the United States, all market segments grew significantly in the fourth quarter: large-cap 6.6%, mid-cap 6.5%, small-cap 4.8% — and those are quarterly returns, not annualized! Outside of the U.S. was also strong with the MSCI ACWI (excluding the U.S.) returning 5.0% for the quarter. This kind of growth is rare, so don’t get used to it and congratulations to you if you stayed in the markets to enjoy these returns!
Fixed Income. As should be expected in rising equity and interest rate markets, both short-term and intermediate-term U.S. government bonds were down a bit for the quarter: -0.3% and -0.5% respectively. That’s okay since a balanced portfolio would have seen significant gains through its equity exposures in this quarter.
Interest Rates. The Federal Open Market Committee (FOMC) raised interest rates three times in 2017: 0.25% in each of March, June, & December for a total of 0.75% increase for the year. The FOMC forecasts three 0.25% rate increases in 2018.
Volatility. Volatility, as measured by the S&P 500 Volatility Index (VIX) was very low throughout 2017 and especially lower in the fourth quarter of 2017.
GDP. Economic growth, as measured by the gross domestic product (GDP), expanded throughout the year, increasing at an annual rate of 3.2% in the third quarter of 2017. The third-quarter annual rate of growth is the highest since the first quarter of 2015. Gross domestic product essentially measures what the economy produces, such as goods and services.
Employment. Despite hurricanes that likely impacted new hires over the latter part of the summer into the fall, employment growth averaged 174,000 new jobs per month in 2017, compared with an average monthly increase of 187,000 new jobs in 2016. The unemployment rate ended the year (as of November 2017) at 4.1% — lower than the 4.6% rate at the close of 2016. The employment participation rate remained the same in 2017 as it was in 2016 — 62.7%. The employment to population ratio was 60.1% in 2017, up slightly from 59.7% in 2016. In 2017, average hourly earnings in 2017 increased 2.5%, or $0.64, to $26.55.
Inflation. While inflation, remained below the Federal Reserve’s stated target rate of 2.0%, indications are that inflation is expanding. A common measure of inflation, the Consumer Price Index, measures the price level of a basket of consumer goods and services purchased by individuals. Over the 12 months ended November 2017, the CPI rose 2.2%.
Imports & Exports. Through October, the goods and services trade deficit had increased $49.1 billion, or 11.9%, compared to the same period in 2016.
Global Economy. The global economy was relatively stable in 2017. In Europe, as negotiations have continued to progress regarding Britain’s exit from the European Union, its economy expanded at a low 1.5% rate, effectively pushing its economy behind that of France in the world rankings. Eurozone inflation increased by 1.5% over 2016. 3Q GDP in Germany, Italy, and Finland expanded at a rate exceeding expectations, while economic growth slowed in France, Spain, and the Netherlands. A jump in capital spending helped propel Japan’s third-quarter GDP to an annualized 2.5% growth rate. The world’s second-largest economy, China, grew at a 6.5% annualized growth rate.
So what does all of this mean for your plan? Probably nothing! After all, if you are working with a financial planner you should be ready for market volatility by:
- Ensuring you have adequate cash flow over the next 2-3 years,
- Keeping your portfolio in balance by revisiting your current asset allocation versus your target 1-2 times per year and ensuring you are within 5% of your target allocations, and
- Continuing to fund your financial goals with regular savings contributions thereby affecting a dollar cost averaging strategy over your long-term savings horizon.
As we enter this new year, it is a natural time to begin thinking about new goals. Take a look at our New Year’s post that can help you jump start these resolutions!