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Market Data Bank

4Q 2017

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Stocks returned 6.6% in the fourth quarter of 2017, following first-, second- and third-quarter returns of, respectively, 6.1%, 3.1% and 4.5%.

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In 2017, the total return on the S&P 500 — including dividends as well as price appreciation — was 21.8%. That’s more than double the annual return of about 10%, averaged since stock return records were first tracked more than 90 years ago.

How often does an increase like 2017’s happen? How likely is a gain of 20% or more, historically? More often than you might think.

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Since the modern era of Wall Street trading began in 1928, 2017 marked the 32nd time stocks returned 20% or more. In three of the last nine years, returns topped 20%. When stocks went up, they have soared at twice the average rate a third of the time.

The erratic surges and drops shows why trying to get in and out of the market is a fool’s game.  A strategic approach, based on a quantitative discipline along with analysis of economic fundamentals, is the best investment.

Since the financial-crisis bear market of 2008, when 37 cents of every dollar invested in stocks was lost and many investors wondered how much worse it might get, stocks returned a profit for nine straight calendar years.

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The current cycle of expansion is now 103-months old.  It’s the third longest expansion in modern U.S. history, coming up on the 106-month long expansion of the 1960s and just a year and a half away from the 120-month boom of the 1990s —  the longest expansion ever. With a strong flow of surprisingly good reports about consumer income and spending, this growth cycle seems capable of setting a new modern record.

But nothing is ever for sure.

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In a speech in New York City on Jan. 11, the nation’s No. 2 central banker warned that the newly enacted tax law poses risk to the creditworthiness of the nation. William C. Dudley, who recently announced he will leave the Federal Reserve Bank in May, after running the influential New York District for eight years, said the tax act’s near-term benefits ultimately could damage faith in the credit of the United States. Dudley, a key architect of Fed interest rate policy after the financial crisis, bluntly told a gathering of Wall Street executives that the current fiscal path of the nation is unsustainable.

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Realistically, a 10% or 15% drop could happen with a flash of bad news, and the chance of a bear-market plunge of 20% or more increases the longer the bull march, now at the eight-and-a-half-year mark, goes on.

Yet not a hint of recession is in the air. Smashing earnings growth is expected in 2017, 2018 and 2019, and earnings are ultimately what drives stock prices.

So despite a political crisis in Washington, D.C., North Korean nuclear weapons development and the new risk posed by tax-reform to the nation’s fiscal health, the Standard & Poor’s 500 has for months continued to break new record highs.

That said, here are the performance numbers for the three-month period, in 2017 versus 2016.

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Of course, three months is too short a period to give a long-term investor, analyzing returns, a good perspective. But at least it gives a picture of short-term trends that may persist.

That said, mid-cap growth companies led the final quarter of 2017 with a 7.1% total return.

U.S. companies are represented by these six distinct capitalization and style characteristics, ranging from small-cap growth to large-cap value.

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Let’s turn to stock sectors. Companies that depend on consumer discretionary income returned a total of 9.9% in 2017’s final three months. Interest-rate sensitive utilities eked out a fractional gain.

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In the quarter ended December 31, 2017, the major foreign stock indexes beat the U.S. again, as global economic growth continued to pick up.

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Let’s look at types of assets: stocks, oil, bonds, real estate, gold, food. Of the 13 distinct types of assets represented by Standard & Poor’s indexes, publicly traded shares in large U.S companies – that is, the S&P 500 -- ranked third in last year’s fourth quarter.

Crude oil’s 16% gain in the fourth quarter followed a more than a 10% gain in the third quarter. Following a collapse in profits in 2016, oil companies have rebounded.

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Let’s take a slightly longer view and check out the view for the whole 12 months of 2017, using style (v or growth) and capitalization size.

In 2017, of the six asset categories representing these, shares of large growth companies were the best performers, with a 27.4% total return. Mid-cap growth companies were second best with shareholder return of 19.9%. There were no poor performers per se. Shares in companies characterized as good values, as opposed to growth investments, also showed decent returns, but growth dominated.

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The technology sector was the standout among industry sectors for the full year, with a return of 38.8%. Apple, Microsoft, Facebook, Google, Visa and MasterCard — all in the sector’s top 10 — were bid higher in price. Investors showed an appetite for more risk. The lagging sectors — telecom, consumer staples and utilities — are characterized as defensive, less-volatile types of equities. Energy and telecom were slightly negative.

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Foreign stocks outperformed the U.S. in 2017. Overseas equities are catching up to the U.S comeback from the global financial crisis. Foreign economies are also benefiting from a weaker dollar. Foreign economic growth simultaneous with U.S. growth is a new event in the U.S. expansion cycle, which sets the trend of world growth.


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In the 12 months ended December 31, 2017, foreign stocks came out on top of this broad array of 13 asset classes. Global economic growth picked up. But U.S. stocks also posted outstanding results. For the first time since the U.S. expansion began in April 2009, foreign economies are growing as fast. Stock markets everywhere surged as the benefits of synchronized global expansion kicked in, and equities dominated the leadership among the 13 assets shown by a wide margin.

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The 2017 return statistics are important for practical reasons, like rebalancing a portfolio.  And 2017, for strategic purposes, was a mirror image of 2016.

The top-performing types of American companies in 2016 were the biggest laggards in 2017. Meanwhile, the worst-performing types of U.S. stocks in 2016 were the biggest winners in 2017.

The orderly rotation in the leaders and laggards vividly illustrates how modern portfolio theory worked in the real world last year. With MPT, investors seek to reap the benefits of diversification in their holdings. So where small-cap value was the leader in 2016, it slipped to last in 2017. But large-cap growth, the 2016 last-place finishers, surged to the lead last year. In other words, they balanced each other out, and an investor holding the different styles-and-size types of stocks made out better than one who bet all the chips on one category.

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Modern portfolio theory is a large body of knowledge based on research in academia over the last 70 years.

This framework for investing is now taught in the world’s best business schools and embraced by institutional investors.

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Basically, classifying investments based on their statistical characteristics imposes a quantitative discipline for managing assets based on history and fundamental facts about the economy.

Of course, human judgment steeped in a sense of the historical performance of investments is critical in applying the theory an individual’s portfolio in the real world.

And all this doesn’t guarantee success — nothing can. It’s called a theory because nothing is certain. But it is the framework for smart investing.

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Applying portfolio theory at the end of 2016 meant lightening up proportionately on the most-appreciated types of assets — small-cap value stocks — and buying more of the types of assets that lagged, the S&P 500 large-cap growth stocks.

The exact amount of each asset is set based on your personal preferences age, specific circumstances.

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Usually, when you look at the returns of asset classes from one calendar year to the next, the performance seems random, there is no order to what occurred.

The orderly reversal of leaders and laggards from 2016 to 2017 vividly illustrates a key concept in managing wealth prudently.

In real-world 2017, then, the theory worked exactly the way it’s supposed to — it was uncanny.

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Global stock market returns reflected a similar mirror image in 2017 versus 2016.

The biggest winners of 2016, small-cap U.S. stocks, were the biggest laggards of 2017, and the biggest laggards of 2016 were the biggest leaders of 2017.

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The real world of investing in 2018 is filled with uncertainty. You can’t be sure what the future holds, but seeing how well portfolio theory worked in the real world in 2017 should boost your confidence in the wisdom of long-term wealth management and financial planning.

Here are five-year performance statistics through the end of 2017 and some key observations about what they mean.

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In 2015 and most of 2016, stock prices went sideways, plunging twice along the way. After the November 2016 election, stocks broke out and invest values climbed steeply to new record highs repeatedly month after month.

In the five-years through 2017, a dollar invested in the S&P 500 more than doubled. That’s an astounding statistic. Since 1928, stock returns, the best gauge of a nation’s economic might, averaged about a 10% return annually at that 10% return rate, every dollar would double in seven years. In this most recent five calendars years, stock investments grew 108%.

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As expected in an expansion cycle, U.S. companies with the strongest growth characteristics were bid up in price the most.

For the five years ended Dec. 31, 2017, large-cap growth stocks grew by 119.2%.  The “small-cap effect,” a rubric holding that riskier small-companies with room to grow will ultimately win the long-run return race of the main types of stocks, did not pan out. Like many investment truths, the small-cap effect is really just a theory.

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In the five years through 2017, stocks characterized as good values lagged. Energy, raw materials, telecom, utilities and consumer staples were not bid up in price by investors hungry for companies most appreciated for accelerating earnings and riding the tailwind of the expansion. The technology sector, led by huge gains in Apple, Microsoft, Facebook and Google, was the leader of the pack of the 10 industry sectors defined by Standard & Poor’s.

The energy and material sectors were battered by the collapse in crude oil and most other commodity prices. The price of crude oil, while up 100% from its early 2016 bottom of $26 per barrel, is still at less than half of its peak 2014 price of $114 per barrel.

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In the five years through 2017, U.S. companies — even when divvied up into small-, medium- and large-size categories —outperformed broad foreign equities indexes across the world by a substantial margin, despite a surge in foreign equities prices in 2017.

In the final year of the five-year period through 2017, U.S. companies lagged foreign stock indexes by a large margin. But the previous four years were dominated by the U.S.

Just as the U.S. was the leader year after year, a rotation of leadership could continue for years. Since no one knows for sure, relying on a combination of the historical performance information and expectations for a range of economic data ahead.

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In the five years through 2017, even when divvied up into small-, medium- and large-size categories, U.S. companies outperformed broad foreign across the world by a substantial margin, despite a surge in foreign stock prices in 2017.

In the final year of the five-year period through 2017, U.S. companies lagged foreign stock indexes by a large margin. But the previous four years were dominated by the U.S.

Just as the U.S. was the leader year after year, a rotation of leadership could continue for years. Since no one knows for sure, relying on a combination of the historical performance information and expectations for a range of economic data ahead.

For instance, real estate investment trusts, both U.S. and global, are top performers.

The S&P 500 index’s total return of 108% over the five years was more than twice the S&P Global ex-U.S. stock market’s return of 47%. In last place, of course, crude oil, which collapsed after the shale-fracking revolution in the U.S. resulted a surge in U.S. oil production.

Commodities and gold, too, were losers in these five years due to a strong dollar, benign inflation, and ample supply of most commodities.

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The earnings picture is bright: Since April 1991, when the decade-long expansion of the 1990s began, profits at large American companies have grown at an average annual rate of 7.4%, and a dollar invested in the average company over this 26-year period averaged a 7.4% total return annually.

But earnings growth up ahead is expected to be much higher than 7.4%. For 2017, 2018 and 2019, earnings growth of 11%, 12% and 10% is what’s expected.

This explains why investors, in recent months, have bid share prices consistently higher.

It’s literally the bottom line.


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