The U.S. stock market finished 2017 very strong, up 6.46% in the fourth quarter and up an amazing 21.47% for the year. It was a truly a remarkable year for the U.S. stock market.
The U.S. stock market posted another quarter of solid gains, benefiting from the anticipation of the tax reform package, increased corporate earnings and a growing economy. Volatility remained at historically low levels during the quarter and year. The S&P 500 has now posted positive returns in every quarter except one in the past five years. The last negative quarter occurred in the third quarter of 2015.
Large cap stocks generated a 6.6% return for the quarter and a 21.7% return for the year, with growth outperforming value. Small cap stocks under-performed large caps, finishing the quarter with a 3.3% return and a 29.6% return for the year, with growth also outperforming value. The NASDAQ finished the quarter up 6.6%, and up 29.6% for the year.
International stocks performed well but lagged behind the U.S. stock market. European economies continue to grow as domestic demand has increased and monetary policy remained extremely accommodative. China continued with structural reforms to their financial systems which has slowed growth but reduced debt. International stock indices were all higher, with the global index (world markets outside the U.S.) was up 5% for the quarter. The index measuring developed markets was up 4.2% for the quarter and 25% for the year. Emerging markets continued to perform very well, up 7.4% for the quarter and 37.3% for the year. I always caution investors that emerging markets are consistently either the best or worst performing asset class.
The U.S. economy remains very strong and continues to grow despite the headwinds from political infighting and geopolitical tensions. GDP is estimated to be 3.2% for the third quarter of 2017, which is down slightly from the prior estimate, but a bit higher than the second quarter at 3.1%.
The global economy benefited from increased demand as well as accommodative monetary policies. The Eurozone grew at a 2.6% annual rate in the third quarter, continuing the positive trend. Japan also continued to fare well and China continues to grow, even while implementing economic reforms.
The employment situation continued to improve.
The Federal Reserve increased interest rates by 0.25% and confirmed its commitment to raise rates in 2018.
Consumer spending slowed, but was offset by an increase in inventories.
Inflation increased slightly.
Corporate earnings grew.
Economists expect wages to increase as the economy reaches full employment.
Housing market continues to grow and looks positive for 2018.
The outlook for 2018 is positive, however, volatility will return to the market. In 2017 the market climbed steadily without pause for the entire year, regardless of the news. 2018 will have more normal market volatility. The tax reform will have a positive impact on businesses and consumers. Businesses across the board will see a reduction in their taxes. Individuals will see an increase in their take home pay as the first $24,000 of income for married couples will be tax free and the rates for all the other brackets have been lowered. Everyone will also see an increase in their standard deductions. A small number of people will have their state property and income tax deductions capped as well as their mortgage interest deductions. But the majority of people will pay lower taxes. The benefits to businesses obviously benefit their employees. We have already seen a slew of businesses give out bonuses, pay raises, increased 401(k) matches and better employee benefits. A raising economy floats all boats.