John Kriel Presents:

QUOTE OF THE YEAR

“The past is a source of knowledge, and the future is a source of hope.”

- Stephen Ambrose

0

THE YEAR IN BRIEF
History will remember 2017 as a terrific year for equities. The Dow Jones Industrial Average advanced 25.08%, practically doubling its 2016 gain. Major tax reforms were passed in Congress, reshaping some of the fundamentals of the Internal Revenue Code. Bitcoin soared to dizzying heights, alarming some economists who saw a bubble ready to burst. While terrorism, devastating storms, and threats of war seized the headlines, the year was calm on Wall Street – nothing seemed to rattle institutional investors much, certainly not enough to cause a correction. Gold, oil, and other key commodities were up for the year; although, most gains did not match those of 2016. The housing market cooled off slightly, then heated up again. Our central bank made three interest rate hikes; other central banks tightened with less frequency or not at all. Most foreign equity benchmarks did well. In fact, investors worldwide did well.1

DOMESTIC ECONOMIC HEALTH
In December, the passage of the Tax Cuts and Jobs Act profoundly altered federal tax laws. Starting this year, the individual estate tax exemption rises to $11.2 million, the standard deduction nearly doubles to $12,000, and the personal exemption and many itemized deductions are gone. The TCJA brought significant tax relief to businesses: the corporate tax rate is now down at a flat 21%, and many pass-through business entities are eligible to claim a 20% deduction on earnings. The individual health insurance mandate is scheduled to disappear in 2019. Tax provisions pertaining to business in the TCJA are largely permanent; the ones pertaining to individuals could sunset at the beginning of 2026.2 

The economy picked up in 2017 after another slow start. A 1.2% year-over-year GDP reading for the first quarter gave way to annualized expansion of 3.1% in Q2 and 3.2% in Q3, growth in line with the post-WWII average recorded by the Bureau of Economic Analysis.3

Consumer spending periodically burst out of its doldrums: it spiked 0.5% in March, 1.0% in September, and 0.6% in November, and it was positive in every month of the year. Retail sales were up 5.8% year-over-year through November, according to the Commerce Department; in the same month, the National Retail Federation reported a 10.5% annualized gain for online retail purchases.4,5

The Conference Board’s consumer confidence gauge peaked at a remarkably high 128.6 in November, ending the year at 122.1 (7.7% higher than its mark at the end of 2016). While the University of Michigan’s index of consumer sentiment ended 2017 2.3% lower at 95.9, that slight year-over-year descent masks a very positive development: in 2017, the index’s average score was the highest seen since 2000.6,7

The twin purchasing manager indices of the Institute for Supply Management, which track the growth rate of U.S. manufacturing and service firms, put up impressive numbers in 2017. Both indices flirted with the 60 mark; at the end of 2017, the latest ISM services and factory PMIs (November) respectively stood at 57.4 and 58.2%. By November, U.S. industrial production had improved 3.4% from a year before.5,8

At the end of 2016, economists questioned if America had reached full employment. The answer: not quite. The jobless rate descended to 4.1% in October, 0.8% below where it had been a year earlier; it remained there in November. The U-6 jobless rate, including the underemployed, continued to move as well, falling to 7.9% in October, but moving up slightly to 8.0% in November. November data from the Department of Labor still showed wages growing at 2.5% per year.9,10

Inflation became more of a factor as the year unfolded. By November, the Consumer Price Index had risen 2.2% in 12 months, a figure exceeding the Federal Reserve’s longstanding target. (Core inflation, however, was running at just 1.7% year-over-year.) The Producer Price Index, which had long displayed tame inflation readings, showed an annualized advance of 3.1% in November (and 2.4% for the core PPI).11

The Federal Reserve made three, quarter-point interest rate hikes in 2017, taking the federal funds rate to a target range of 1.25-1.5%. A trio of rate increases are also envisioned for 2018. President Trump nominated Fed official Jerome Powell to chair the central bank; he succeeds Janet Yellen early this year.12

Lastly, another major data breach made news: one of the three major credit bureaus, Equifax, had data raided from at least 143 million accounts. This theft may affect U.S. consumers for years to come.12

GLOBAL ECONOMIC HEALTH
The Trans-Pacific Partnership suffered a severe blow in January, as the United States withdrew from the pending Pacific Rim trade agreement. The TPP’s remaining nations were left to restructure the accord minus U.S. involvement.13

China’s economy, judged to grow at 6.9% for 2017 by its official projection, appeared to be slowing down as the year ended; the forecast was for 6.5% expansion in 2018. New smog regulations on its factory sector were implemented in November. The nation’s credit-to-GDP ratio was roughly 25% above long-term trends, with household debt continuing to increase dangerously. Japan’s economy, which has improved markedly since early 2016, was growing at 2.1% by Q3, the best annual pace in two years. At last look, Japan’s jobless rate was only 2.7%.14,15 

Even with the imminent Brexit, things were largely looking up for the economies of Europe. By Q3, the European Union’s economy was growing at a 2.6% annual pace. Unemployment in the euro area was at 8.8% in November, but just 7.4% in the eurozone. Inflation approached 1.5% in both economic regions by fall, in contrast to the deflation seen as recently as the first half of 2016.15,16

Foreign central banks did not exactly take cues from the Federal Reserve in 2017. While the Bank of England and Bank of Korea tightened toward the end of the year, the Reserve Bank of India lowered its key rate, and the European Central Bank stood pat (it did reveal plans to taper its long-running stimulus in October).17

WORLD MARKETS
European equity benchmarks were nearly all positive for 2017 (an exception was Russia’s Micex, which lost 4.38%). The FTSE 100 rose 7.97% year-over-year; the DAX, 12.81%; the CAC 40, 9.80%; the FTSE Eurofirst 300, 7.35%; the IBEX 35, 7.69%. Those nice gains paled compared to some others.18

Hong Kong’s Hang Seng, for example, advanced 37.30%. India’s Nifty 50 improved 29.95%, and its Sensex, 29.17%. South Korea’s Kospi climbed 21.88%. The Nikkei 225 recorded a gain of 18.91%. Taiwan’s TSE 50 advanced 15.56%. There was just a 6.84% yearly gain for the Shanghai Composite. While Mexico’s Bolsa and Canada’s TSX Composite added just single-digit annual returns of 7.50% and 5.10%, Argentina’s Merval jumped 81.57% and Brazil’s Bovespa advanced 27.80%. MSCI’s World Index increased 20.11% for the year; its Emerging Markets index, 34.35%.18,19

COMMODITIES MARKETS
The year saw some striking gains for select commodity futures – in particular, bitcoin and palladium. Last January, bitcoin crashed from near $1,300 down to $786. The price neared $1,300 again in March, fell to $935 later that month, topped $3,000 in July, $5,000 in October, $7,500 in early November, and nearly cracked $20,000 on December 18. It ended the year just above $14,600, posting a 2017 gain of more than 1,300%. Palladium rose 54.29% during 2017, leading all mainstream commodities.20,21

Other big commodity wins of 2017 included a 29.86% advance for copper, a 21.61% jump for lumber, and gains of 13.19% for cotton, 12.01% for gold, and 10.54% for RBOB gasoline. WTI crude rose 6.17% for the year; silver, 5.16%; platinum, 2.01%. Among the notable 2017 descents, soybeans slumped 4.15%; corn, 9.83%; wheat, 10.62%; cocoa, 13.33%; coffee, 15.64%; natural gas, 20.79%; orange juice, 27.00%. The S&P GSCI commodity index rose 9.11% for the year, while the U.S. Dollar Index fell 7.92%. WTI crude ended 2017 at $60.10 on the NYMEX, while gold and silver closed out the year at $1,305.10 and $16.98, respectively, on the COMEX.21,22

REAL ESTATE
While monthly numbers regarding home buying, home prices, and home construction are often volatile and conspicuous, annualized numbers matter most. Looking at some of those year-over-year marks, it is evident the residential real estate market maintained its pace in 2017, at least through the most recently available data. Through November, existing home sales had improved 3.8% in a year, and the pace of resales was near an 11-year high according to the National Association of Realtors. In December, the Census Bureau stated that the annualized rate of new home sales was 26.6% better than it was in November 2016. In its October edition, the 20-city S&P CoreLogic Case Shiller Home Price Index showed 6.4% yearly appreciation, compared to 6.2% in the September edition.11,23

Another Census Bureau report noted a 3.4% annual rise in groundbreaking as of November. Building permits, too, were higher year-over-year: the gain was 12.9%.24

In Freddie Mac’s December 28 Primary Mortgage Market Survey, average interest rates were notably cheaper than they had been a year earlier, adjustable-rate mortgages excepted. The December 28 averages: 30-year fixed, 3.99%; 15-year fixed, 3.44%; 5/1-year adjustable, 3.47%. On December 29, 2016, the averages stood like so: 30-year fixed, 4.32%; 15-year fixed, 3.55%; 5/1-year adjustable, 3.30%.25,26 

LOOKING BACK…LOOKING FORWARD
To fully grasp how placid the market was in 2017, consider this factoid: the S&P 500 went the entire year without experiencing more than a 2% downturn. In addition to the great 2017 returns noted below, note also the 13.14% yearly gain for the Russell 2000. At the year’s final closing bell, the four important U.S. equity indices settled as follows: Dow, 24,719.22; Nasdaq, 6,903.39; S&P, 2,673.61; Russell, 1,535.51.1,27

Looking over the assorted U.S. equity benchmarks, the PHLX Semiconductor index displays the best 2017 return of all: +38.23%. Unsurprisingly, the CBOE VIX “fear index” was the big loser of 2017, sliding 21.23%.1

Source: wsj.com, barchart.com, bigcharts.com, treasury.gov - 12/29/171,28,29,30,31

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.

Last year was a year to savor for investors, delivering not only fine returns but also substantial tax reforms that could help boost corporate profits. This year, the giddiness that aided the bulls in the first and fourth quarters may soon moderate if risks, mysteriously absent in 2017, return. A geopolitical shock could rock the markets. The Fed could accelerate the pace of its rate hikes if inflation pressure continues to build, wages rise in step, and the economy flirts with overheating. In fact, a sudden rush of inflation pressure might be the leading candidate among factors that could cause the current business cycle to fade – should the Fed need to make four or more hikes this year that would pose a significant challenge for equities. There is also the sense that investors are growing dangerously confident, even euphoric; phenomena in the manner of the 2017 bitcoin rally tends to be seen when a bull market is in its last stages. All this noted, the 2018 tax reforms seem sure to boost business profits and confidence, and Main Street may reap their potential rewards as well. So, look at 2018 with guarded optimism. Risks have not vanished; investors may contend with plenty of them in 2018.

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This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The MICEX 10 Index (Russian: Индекс ММВБ10) is an unweighted price index that tracks the ten most liquid Russian stocks listed on MICEX-RTS in Moscow. The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The FTSE Eurofirst 300 measures the performance of Europe's largest 300 companies by market capitalization and covers 70% of Europe's market cap. The IBEX 35 is the benchmark stock market index of the Bolsa de Madrid, Spain's principal stock exchange. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The NIFTY 50 index is National Stock Exchange of India's benchmark broad based stock market index for the Indian equity market. It represents the weighted average of 50 Indian company stocks in 12 sectors and is one of the two main stock indices used in India. The BSE SENSEX (Bombay Stock Exchange Sensitive Index), also-called the BSE 30 (BOMBAY STOCK EXCHANGE) or simply the SENSEX, is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE). The Korea Composite Stock Price Index or KOSPI is the major stock market index of South Korea, representing all common stocks traded on the Korea Exchange. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The FTSE TWSE Taiwan 50 Index consists of the largest 50 companies by full market value, and is also the first narrow-based index published in Taiwan. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The Mexican Stock Exchange commonly known as Mexican Bolsa, Mexbol, or BMV, is the only stock exchange in Mexico. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The MERVAL Index (MERcado de VALores, literally Stock Exchange) is the most important index of the Buenos Aires Stock Exchange. The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. The PHLX Semiconductor Sector Index is a Philadelphia Stock Exchange capitalization-weighted index composed of companies primarily involved in the design, distribution, manufacture, and sale of semiconductors. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

Citations.

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3 - tradingeconomics.com/united-states/gdp-growth/ [1/1/18]

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8 - instituteforsupplymanagement.org/ISMReport/NonMfgROB.cfm?SSO=1 [12/5/17]

9 - nasdaq.com/article/228k-new-jobs-41-unemployment-to-ring-in-the-holidays-cm888946 [12/8/17]

10 - ncsl.org/research/labor-and-employment/national-employment-monthly-update.aspx [1/1/18]

11 - investing.com/economic-calendar/ [1/1/18]

12 - fool.com/investing/2017/12/19/5-top-financial-sector-stories-of-2017.aspx [12/19/17]

13 - dw.com/en/a-look-back-at-asia-in-2017/g-41901168 [12/29/17]

14 - theguardian.com/business/2017/dec/31/chinas-growth-engine-stutters-as-factories-slowdown [12/31/17]

15 - seekingalpha.com/article/4134652-international-economic-week-review-2017-ends-high-note [12/31/17]

16 - ec.europa.eu/eurostat [12/29/17]

17 - forbes.com/sites/insideasia/2017/12/19/the-fed-interest-rate-hike-how-hard-will-it-hit-asia/ [12/19/17]

18 - markets.on.nytimes.com/research/markets/worldmarkets/worldmarkets.asp [12/29/17]

19 - msci.com/end-of-day-data-search [12/29/17]

20 - markets.businessinsider.com/currencies/news/bitcoin-price-in-2017-review-2017-12-1012345441 [12/31/17]

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22 - money.cnn.com/data/commodities/ [12/29/17]

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24 - census.gov/construction/nrc/pdf/newresconst.pdf [12/19/17]

25 - freddiemac.com/pmms/archive.html [1/3/18]

26 - freddiemac.com/pmms/archive.html?year=2016 [1/3/18]

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