2017 RECAP
enero 18, 2018
| U.S. EQUITIES WERE THE HEADLINE STORY IN MARKETS. CREDIT MARKETS WERE STABLE. U.S. DOLLAR: PARITY NOT TO BE, 1ST DECLINE IN MULTIPLE YEARS, THE EURO CLOSED 2017 AT $1.20. COMMODITY PRICES UNIFORMLY HIGHER: WTI $60, GOLD $1300.
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Green pastures for U.S. equities all-year-long. Tax-reform, a reality. The U.S. Dollar declined most of 2017, the Euro’s best showing since 2003. Oil & Gold saw late spurts to close on upbeat notes. Treasury yield curve tightened in 2nd-half as the 10-year note stayed range-bound. Stock volatility remained at historical lows. The Federal Reserve kept their word and hiked the funds rate 3 times. Outlook, 3 Fed rate hikes in 2018.
From start-to-finish the words resilience and perseverance fairly described U.S. equity indices drive toward multiple highs. A banner year. The Dow and Nasdaq set a record number of records, while the benchmark S&P rose 440 points, from 2240 to 2680, and gained 20%. Most impressive – not the absolute percentage returns, but the lack of downside volatility, nearly 2 years without a 10% correction, and 12 months without more than a 3% drawdown in the S&P 500. This bull market is now the 2nd longest ever.
In credit-land, the year opened with much volatility, a continuation of late 2016, but quieted soon after the opening quarter of the year. The main reason(s), the reflation trade was recalculated, and inflation saw a meaningful markdown after an early spurt. In numbers, core inflation briefly crossed-over 2%, but backed away by spring enough to warrant a full-blown debate on whether the lull was temporary due to transitional factors, or a longer-term issue. At year-end, that discussion remains ongoing, with the Fed data dependent going forward, but with an economy strong enough to sustain a gradual pace of interest rate hikes despite low inflation readings. That, in a nutshell was the Fed’s general view throughout the year. Economic data surprised to the upside, especially in the 2nd-half, and was fully reflected in GDP with back-to-back 3% quarters. At year-end, the consensus forecast calls for the 4th quarter to make it 3 in-a-row. That would be impressive, a feat last accomplished a dozen years ago (pre-great recession).
The U.S. dollar disappointed, especially vs. its key European counterparties, the Euro and Pound. The greenback hit-a-high near $1.03 on the 1st business day of the year and, slowly but surely, faded over time, especially in the 2nd-half. The incoming U.S. administration signaled the dollar was ‘too strong’ from the start, and seemed to take the starch out of the home currency. With late 2016’s (post-election) upward momentum gone, rate differentials were offset by the continent’s surprising pick-up in growth. By year-end, GDP estimates had been adjusted more than once, with 2017 on pace to far exceed any year since the financial crisis. A stronger Euro may be a headwind for stocks, but global growth and earnings should more than balance the scales. Worth noting, Europe is more dependent on exports, benefiting to a greater degree from global growth and trade. Oil prices bounced back from lows, held steady for months, before late momentum took WTI to its highest in more than 2 years. The combination of a softer dollar, and a larger than expected drawdown in the weekly inventory provided the impetus to break $60 a barrel.
