ECONOMIC FLASH – Entering 2018 in Good Shape
January 2018
US Economy: No recession on horizon.
For 3rd quarter 2017, US GDP growth settled at 3.2% (final estimate), the fastest pace in more than 2 years. Data on US consumer confidence, the manufacturing outlook, and residential building permits suggest continued expansion.
US Stocks: Tax reform winners and losers.
Large US equities got a boost from tax reform, which significantly lowers the official corporate tax rate. However, companies will no longer be able to deduct interest rate payments fully, and this adversely impacted small-cap equities.
Foreign Stocks: Top performers in 2017.
Non-US stocks benefited from a weaker US dollar and a stable growth outlook. UK stocks led Europe on strong results from global companies, while a rally in commodity prices provided a boost to emerging markets.
Fixed Income: Muni outlook good.
Despite a year-end surge in issuance as municipalities attempted to lock in lower rates, long-maturity municipal bonds performed well in Dec., since 50% less issuance is expected in 2018 vs. 2017.
Non-Traditional: Commodity rebound.
Stronger demand for commodities and anticipated inflation drove prices higher. Oil (+5.2% in Dec.) closed 2017 at $67, a price unseen since late 2014, partly due to tensions in the Middle East.
THE TAKEAWAY
As we move into 2018, we are not reducing our overall allocation to global equities. We do expect to shift our equity mix to incorporate sectors that offer value and are likely to benefit from a pickup in inflation, as tax reform kicks in.
Within fixed income, we continue to recommend strategies that are less vulnerable to rising interest rates. However, we are maintaining our exposure to municipal bonds, whose pricing is supported by lower issuance and rising demand.
Glossary and Disclaimer for Economic Flash
Equities Total Return
| DEC | 3 MOS | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | 1.1% | 6.6% | 21.8% |
| U.S. Small Cap | (0.4%) | 3.3% | 14.6% |
| U.S. Growth | 0.7% | 7.6% | 29.6% |
| U.S. Value | 1.3% | 5.1% | 13.2% |
| Int’l Developed | 1.6% | 4.2% | 25.0% |
| Emerging Markets | 3.6% | 7.4% | 37.3% |
Fixed Income Total Return
| DEC | 3 MOS | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | 0.5% | 0.4% | 3.5% |
| TIPS | 0.9% | 1.3% | 3.0% |
| U.S. High Yield | 0.3% | 0.4% | 7.5% |
| Int’l Developed | (0.1%) | 1.4% | 8.9% |
| Emerging Markets | 1.3% | 1.7% | 10.3% |
| Tax-Exempt | |||
| Intermediate Munis | 0.4% | (0.8%) | 2.9% |
| Munis Broad Mkt | 1.0% | 0.7% | 5.4% |
Non-Traditional Assets Total Return
| DEC | 3 MOS | 1 YR | |
|---|---|---|---|
| Commodities | 3.0% | 4.7% | 1.7% |
| REITs | (0.3%) | 2.5% | 8.7% |
| Hedge Funds | |||
| Absolute Return | 0.3% | 0.1% | 3.3% |
| Overall HF Market | 0.8% | 1.5% | 6.0% |
| Managed Futures | 0.7% | 5.4% | 2.5% |
Economic Indicators
| DEC-17 | SEPR-17 | DEC-16 | |
|---|---|---|---|
| Equity Volatility | 11.0 | 9.5 | 14.0 |
| Implied Inflation | 2.0% | 1.9% | 2.0% |
| Gold Spot $/OZ | $1303 | $1280 | $1152 |
| Oil ($/BBL) | $67 | $58 | $57 |
| U.S. Dollar Index | 88.2 | 87.1 | 95.4 |
