2017 was an outstanding year for investors. Markets went up throughout the year with little volatility and no significant pull-backs. This certainly has been a pleasant surprise, given the political uncertainty, noise, and dysfunction in Washington. Here’s a quick overview of the performance of major indices this past year.
The S&P 500 Index was up 21.83%, in total return. US stocks were already fairly valued at the start of the year, but investor enthusiasm for technology companies has pushed markets even higher. That means we start 2018 at even higher valuations than those which concerned us a year ago.
I’d also note that growth stocks outperformed value strategies, by nearly 2X in 2017. I think this will reverse at some point as value stocks have a widening discount to growth companies. US Large Cap outperformed Small Cap by a wide margin, reflecting the more expensive valuations of small companies.
Look at international markets, the MSCI EAFE index, representing developed economies outside the US, was up 25.03%. The MSCI Emerging Markets Index soared 34.35% on the year. Both of these were boosted by a sagging dollar in 2017. We don’t make active bets on currency direction, so we don’t have an opinion on whether or not this continues to enhance returns in 2018. However, economic growth and stock fundamentals are both favorable for international stocks in the year ahead.
Turning to bonds, the Barclay’s Aggregate Bond Index was up 3.54%, a decent return for a year in which the Federal Reserve raised rates three times. We believe that bond investors should have modest expectations for 2018. Rising rates suggest favoring shorter duration bonds for defense.
We’ve updated our portfolio models for 2018 and can celebrate the returns we received in 2017. We remain broadly diversified and get most of our equity exposure from low-cost, tax-efficient index ETFs. Our overweight to Emerging Markets has been beneficial this past year, although our allocation to US Value has been a drag on performance. The rationale for both positions remains unchanged so we will continue to hold both.
We spend considerable time on investment management, but generally, think it is more beneficial to you to write here about financial planning topics. As always, if you have any questions about investment strategies, please feel free to reply or call anytime.
Source of data: Morningstar as of 12/30/2017.