Please find the next blog in our monthly series that provides timely market data as well as perspectives on the current state of the economy and the global financial markets.
President Trump signed into law the Tax Cuts and Jobs Act, the most sweeping change to our nation’s tax code in more than 30 years. Addressing primarily corporate tax rates, the legislation also adjusted some personal tax rates and modified several key deductions/credits. Having been in the works for much of 2017, the reaction from the markets has been somewhat muted. Growth momentum continues to be strong in most economies of the world, although the UK is experiencing some notable “Brexit-pains.”
The US economy continues to display solid fundamental trends, with recent manufacturing data improving and confidence continuing to be high both among consumers and in the business sector. That said, 3Q-17 real gross domestic product (GDP) was revised slightly downward to 3.2%. Core PCE, the Federal Reserve’s preferred measure of inflation, advanced a bit, but remains below target at 1.5% on a year-over-year basis.
In line with expectations, the Federal Open Market Committee (FOMC) increased rates by 25 bps mid-month. Though inflation continues to be lower than anticipated (and desired), three additional rate hikes are forecasted for 2018, as financial conditions continue to be favorable and asset values continue to rise. Subsequently released minutes from the meeting indicated much discussion around the risks of increasing rates too quickly as well as too slowly. Certain economic relationships continue to be puzzling, particularly as it relates to inflation and unemployment.
December’s jobs report continued the trend of strong net workforce additions, but came in slightly below expectations. The unemployment rate remained at 4.1% and the participation rate held steady at 62.7%. Nonfarm payrolls increased by 148,000 overall, 32,000 below expectations. For the year, 2.1 million jobs were added, the seventh straight year above 2.0 million. Manufacturing added 196,000 jobs in 2017, following a nearly flat 2016. Average hourly earnings remain tepid for a maturing cycle, with wages increasing just 2.5% year-over-year.
US equities finished a strong year, with the benchmark S&P 500 index completing its 14th straight month of positive returns (+1.1%). In fact, there has only been one negative month in the last twenty-two, and the lack of even intra-month declines is quite rare. Telecom (+5.8%) and Energy (+4.7%) led the way, with Utilities (-6.4%) hardest hit. For the year, IT (+36.9%) led the way, with Healthcare (+20.0%), Financials (+20.0%), Consumer Discretionary (+21.2%) and Materials (+21.4%) close behind. Energy (-3.8%) and Telecom (-6.0%) were the laggards of 2017.
In small cap, returns were slightly negative (-0.4%), and perhaps surprising in light of the passage of tax reform. However, with the outcome expected since late November, investors “sold the news.” Growth (+0.1%) exceeded Value (-0.9%) by nearly 110 bps. For the year, Growth (22.2%) also significantly outperformed Value (10.4%).
Overseas, the MSCI EAFE index was up strongly at +1.6%. Although Japanese stocks advanced moderately at +0.7%, the MSCI Pacific Ex Japan index was up 3.8% for the month. For the year, international developed markets were strong across the board, with many countries/regions in the +25% range. Developing economies performed well in December, with MSCI Emerging Markets up another +3.6%. For the year, the index gained +37.8%, with MSCI Emerging Markets Asia (+43.3%) leading the way on the back of Chinese and South Korean IT names.
Real estate was mixed in December, with the FTSE EPRA/NAREIT Developed index up (+1.4%) and the FTSE NAREIT US Real Estate index essentially flat (-0.1%). The Alerian MLP index had a very solid month (+4.7%) amid firming energy prices, but the category stands out as the dramatic underperformer for the full year (-6.5%).
Commodities finished the year on a strong note, with both gold (+2.8%) and the Bloomberg Commodity index (+3.0%) up in December. For the year, gold was up +13.7%, even as weak agricultural returns tempered the full index (+1.7%).
Within fixed income, December was really a microcosm of year-long trends. The Bloombar Global Aggregate index gained +0.4% during the month, with modestly positive underlying bond returns supplemented by the benefits of currency translation. The US dollar depreciated against every other G10 currency in 2017, and this factor accounted for nearly 60% of the return earned by unhedged US-based investors.
With the FOMC increasing its benchmark interest rate for the fifth time since the hiking cycle began in late 2015, the dominant story continued to be around the shape of the US Treasury (UST) yield curve. Policy sensitive 2-year UST yields advanced steadily to 1.89%, while the 30-year bond yield actually fell below 2.75%. Longer-term bonds continue to reflect relatively benign inflation signals and central bank intervention overseas, which offsets the Fed’s policy normalization and a corporate tax cut that promises to widen deficits and add to the stockpile of government debt.
The Bloombar US Aggregate index returned +0.5% in December, lifting calendar year returns to +3.5%. Government-related issues trailed the primary market’s other key sectors on a duration-matched basis. IG corporate credit spreads tightened by 4 bps, and have re-established new 10-year lows. The IG corporate credit basket currently yields just 3.25%.
The Bloombar 1-15-Year Municipal index returned +0.8%. Tax reform drove December issuance to record levels, but robust investor demand allowed tax-exempt issues to outperform UST’s across the curve. Despite a slightly lowered top tax rate, it’s believed that retail investors (~70% of the buyer base) should have a sustained appetite for the category.
The Bloombar US Corporate High Yield index produced a gain +0.3% in December. With over 65 bps of spread tightening throughout the year, 2017 returns of +7.5% exceeded “coupon clipping” assumptions. Emerging market bond returns were universally positive, although local currency bonds dramatically outperformed issues more sensitive to US rates.
Disclaimers: The data contained in this report is provided from Asset Consulting Group (ACG). This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. Gryphon Financial Partners shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Gryphon Financial Partners, LLC is a Registered Investment Adviser.