2017 was a year characterized by low volatility, a flattening yield curve and narrowing corporate bond spreads. The economy grew modestly and the Federal Reserve (the Fed) began to pull back its monetary accommodation.
During the fourth quarter, the stock market, as measured by the S&P 500 Index (the S&P 500), rose another 6.64%, propelling its full year 2017 total return to 21.83%. This reflects the continued low inflationary economic expansion, rising corporate profits and a very clear pro-business agenda in Washington.
In sum, while there are certainly signs of excessive risk-taking in some areas, we feel that they are not systemic risks such as we saw in 2008. A healthy tailwind to corporate profit growth aided by the recent corporate tax rate cuts means that we will not likely see signs of economic weakness for a few years.
During the third quarter, the economy continued its slow, low inflationary expansion and the equity market continued to gain ground. Real Gross Domestic Product (GDP) expanded by an estimated 2.5%, and inflation hovered around 2.0%.
In a nutshell, we believe that the slow growth, low inflation trajectory will continue a while longer and, as a result, the Fed can maintain a very measured pace unwinding its unprecedented monetary ease.
“It is a Riddle, Wrapped in a Mystery, Inside an Enigma: but Perhaps There is a Key” - Winston Churchill
“Not see the forest for the trees” is an idiom derived from British English that describes someone who is so focused on the minutiae that they miss the larger picture.
During the first quarter of 2017, the stock market (as measured by the S&P 500 Index) enjoyed a 6.07% total return. The gains reflect (1) the steady, persistent, non-inflationary economic recovery that has characterized the post-2008 period and (2) investor enthusiasm for President Trump’s pro-business, pro-growth policies.
Since the election of Donald Trump as our next President and the Republicans’ win of both the House and Senate, much has changed in regards to our economic and investment outlooks.
Investors would have done well in 2016 to heed the words of Heraclitus, paraphrased: “Expect the unexpected.” Brexit and the U.S. election results were two glaring examples of the unexpected becoming reality.