In 2017, investors relished in solid economic growth, combined with abnormally high market returns, low unemployment and low market volatility. For the year, the S&P 500 increased 21.8% and the FTSE All World Ex-Us Index was up 24.40%. Investors watched as the Trump administration completed its first year in office, hurricanes ravaged parts of the country, and a tax reform bill was passed. In 2018, we expect GDP growth to accelerate, unemployment to decrease, interest rates to rise and inflation to increase slightly as the Tax Cuts and Jobs Act of 2017 takes effect.
Capital Markets Review
January 1, 2017 – December 31, 2017 index returns:
S&P 500 (U.S. Large Cap): 21.8%
Russell 2000 (U.S. Small Cap): 14.6%
MSCI EAFE (Developed International Markets): 25.6%
MSCI EME (Emerging Markets): 37.8%
Barclays Capital Aggregate (U.S. Fixed Income): 3.5%
Barclays Global High Yield Index: 10.4%
Bloomberg Commodity Index: 1.7%
The U.S. economy has been steadily expanding for 9 years. In the third quarter of 2017, real GDP increased at an annual rate of 3.1%. Total nonfarm payroll employment increased by 148,000 in December, and the unemployment rate was unchanged at 4.1%. In December, the ISM Manufacturing Index rose to 59.7, from 58.2, leaving it close to a 13-year high. We believe the Federal Reserve, with new Fed Chair Jerome Powell, will likely raise rates a few times in 2018 as the global economy continues to improve. The Fed estimates about 2.5% growth in 2018, which we believe is conservative.
In 2017, most major currencies appreciated against the U.S. dollar, which has a positive impact for investors with international investments. The yield on the 10-year Treasury is 2.5%, and we expect this to rise, however at a slower rate than short term interest rates. As a result, the yield curve will likely flatten.
Right before Christmas, President Trump passed the Tax Cut and Jobs Act of 2017, which gives various tax cuts to individuals and corporations in addition to other tax related changes. For a comprehensive review of the changes, and implications for the economy, portfolios, please see the Callan Capital Guide: Tax Cuts and Jobs Act of 2017.
Globally, growth and manufacturing is strong. In the eurozone, GDP growth and earnings are solid. Both reflation and rejecting the populist movement have been instrumental in sustaining the recovery that is ongoing. We see this as a tailwind to eurozone financial markets and international returns. We are keeping an eye on Brexit negotiations and the elections in Italy in the first quarter of 2018. As mentioned in prior communications, we increased international exposure in 2015, and our portfolios have benefited.
The Asia Pacific region had a good year, with solid growth and Chinese demand. We see a need to be cautious with China, as they are dealing with high debt levels. Hopefully, they will be able to de-lever by gradually tightening credit. However, China has a goal of doubling GDP per capita, and moving towards a consumption led economy, which will benefit many countries in the region.
What to Expect in 2018
We expect the U.S. economy in 2018 to benefit from the Tax Cuts and Jobs Act of 2017, but the benefits could be short term. Eventually, we feel that the increases in our federal deficit resulting from the tax cuts and increased spending will hinder growth in future years.
In 2018, we see unemployment decreasing to below 4% for the first time in 50 years and a boost in profits and earnings for corporations around the globe. It will be interesting to see how companies deal with tax cut savings, and where they allocate their funds.
This economic backdrop bodes well for stocks and is typically a headwind for fixed income given higher interest rates. We feel much of this story is priced into the stock market and expect more muted returns and higher volatility as we move into the later stages of our U.S. recovery. We are more optimistic about the opportunities overseas given the relative valuations.
Market performance in 2017 reminds investors that it is important to align with an investment philosophy based on discipline and diversification, rather than timing and prediction. To be able to predict the market, investors would have to both accurately forecast events and how markets will react to those events. We believe that this is risky, and not possible on a consistent basis.
We continue to monitor the global economy and seek opportunities to invest in certain sectors and geographic regions given the current market environment. In our view, a long-term investment horizon, asset allocation, diversification and discipline remain crucial to portfolio success. If you are a client and would like further detail on these topics or anything else, please call or email us. If you are not a client, but would like more information on Callan Capital’s wealth management services, please contact us at (858) 551-3800 or www.callancapital.com.
 2018 Global Market Outlook, Russell Investments. January 2018.
Important Index Descriptions and Disclaimers
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS
The following descriptions, while believed to be accurate, are in some cases abbreviated versions of more detailed or comprehensive definitions available from the sponsors or originators of the respective indices. Anyone interested in such further details is free to consult each such sponsor’s or originator’s website.
The past performance of an index is not a guarantee of future results. Each index reflects an unmanaged universe of securities without any deduction for advisory fees or other expenses that would reduce actual returns, as well as the reinvestment of all income and dividends. An actual investment in the securities included in the index would require an investor to incur transaction costs, which would lower the performance results. Indices are not actively managed and investors cannot invest directly in the indices.
S&P 500®: Standard & Poor’s (S&P) 500® Index. The S&P 500® Index is an unmanaged, capitalization – weighted index designed to measure the performance of the broad US economy through changes in the aggregate market value of 500 stocks representing all major industries.
Russell 2000 Index: An index measuring the performance approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States.
EAFE Index: An index created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in international index has been in existence for more than 30 years.
EME Index: An index created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in global emerging markets. It is a float-adjusted market capitalization index that consists of indices in 21 emerging economies.
Barclays Capital Aggregate Bond Index: An index maintained by Barclays Capital, which took over the index business of the now defunct Lehman Brothers, and is often used to represent investment grade bonds being traded in United States. It is an unmanaged index considered representative of fixed-rate, noninvestment-grade debt of companies in the US, developed markets and emerging markets.
Barclays Global High Yield Index: An index maintained by Barclays Capital.
Bloomberg Commodity Index: A broadly diversifiedcommodity price index distributed by Bloomberg Indexes. It tracks prices of futures contracts on physical commodities on the commodity markets. The index is designed to minimize concentration in any one commodity or sector. It currently has 22 commodity futures in seven sectors.
Nothing contained herein is intended constitutes accounting, legal, tax advice or investment recommendations, or the recommendation of or an offer to sell, or the solicitation of an offer to buy or invest in any investment product, vehicle, service or instrument. Callan Capital does not provide individual tax or legal advice. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. For more information, please refer to our most recent Form ADV Part 2A which may be found at adviserinfo.sec.gov.
Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without previous notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect to any error or omission is accepted. This information should not be relied upon by you in evaluating the merits of investing in any securities or products mentioned herein. In addition the Investor should make an independent assessment of the legal, regulatory, tax, credit and accounting and determine, together with their own professional advisers, if any of the investments mentioned herein are suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance. The information presented herein is for the strict use of the recipient and it is not for dissemination to any other third parties without the explicit consent of Callan Capital LLC.