4Q2017 | All Ages
The month of October brought us continued growth in global equity markets, with impressive monthly gains across most major indices. The DOW, S&P 500, and NASDAQ posted October returns of 4.44%, 2.33%, and 3.57% respectively, bringing their year-to-date figures to an eye-popping 20.58%, 16.91%, and 24.98%. Though the 2017 performance gap has narrowed a bit, international markets remained strong with the MSCI EAFE returning 1.53% in October (22.31% YTD) and the MSCI Emerging Market index adding 3.51% (32.64% YTD). Bonds were relatively flat, with the Barclay’s US Aggregate adding .06% in the month of October and 3.20% for the year.
Despite the fact that a fair degree of caution is merited, hopes have resurfaced on the tax reform front, which could drive substantial equity price movement if ultimately passed. The proposed changes would dramatically reduce the Corporate Income tax rate, slashing it from the current maximum level of 35% down to 20%. This immediate boost to earnings would be coupled with a favorable repatriation rate of 10% for cash balances currently stored overseas. This would be an enormous windfall for some of our nation’s largest companies who currently hold significant cash levels abroad that they have been otherwise reluctant to bring back for investment into domestic projects. However, the proposed bill is not without hurdles, as CBO has suggested that it will create a rather significant increase in the federal deficit, which may be hard to stomach for both political parties.
The Federal Reserve does appear poised to raise short term rates again in December, and their well-documented plan to begin reducing their balance sheet is now in process. Rates have trickled somewhat higher, but the predictable and gentle movements from the Fed have alleviated fears of dramatic broader interest rate movements. Even though rates that generally trend upward will be a headwind for fixed-income investment returns in the near term, we believe that the normalization process is healthy for markets over the long run, and re-arms the Fed with options for the next recession we will ultimately face.
While the political scene may be dominating the headlines, corporate earnings ultimately drive stock prices, and we have enjoyed a robust earnings season for most sectors of the market, helping to support our current record-high price levels. While valuations do still appear to be somewhat stretched with the rapid ascent that we have experienced, we do feel that the general economic picture is positive and will likely lead to slower, but steady market performance in the coming 12-18 months – barring any unforeseen geopolitical crisis. With that said, corrections can occur at any time and happen quickly, so we would simply urge investors to remain disciplined and diversified in their approach.
Eric Krause, CFA
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