4th Quarter 2017
The stock market powered upwards in the fourth quarter of 2017. The Russell 1000 was up 6.6%, while the Russell Midcap rose 6.1% and the Russell 2000 increased 3.3%, ending a much stronger year than most had expected.
There has been synchronized global GDP expansion against a backdrop of muted inflation and low interest rates. US business optimism has grown due to regulatory relief, good profits and the lowering of the corporate tax rates starting in 2018. We expect the US economy to grow at 3% – an improvement over the past few years. Employment has been strong, fueling fears of higher inflation, but we still expect inflation to be relatively low due to the continued benefits of technological innovation. Corporate earnings are likely to be solid again in 2018, although reported numbers may be muddied by some companies taking write-offs in 2017 in anticipation of the new tax code. The markets are likely to “look through” these write-offs, however, focusing on operating numbers instead. Interest rate increases will again be data dependent, but we do not expect any sharp change of course from the Fed.
The stock market P/E remains high by historical standards and has been supported by strong corporate earnings. Low interest rates and underlying economic strength are likely to continue to bolster profits. We believe that equities still look attractive relative to other asset classes such as fixed income, and that US stocks remain attractive compared to other markets. As a result, we expect US stocks to continue their rise.
Geo-political risks persist and horrifying acts of global and domestic terrorism remain in the news. The markets have continued to shrug these off, focusing instead on improving global growth.