THE MONTH IN BRIEF

Financially speaking, the last month of 2017 was also the year’s most newsworthy. Congress reformed federal tax law to a degree unseen since the 1980s, the Federal Reserve raised the benchmark interest rate, and bitcoin took its investors for a wild ride. Hiring, retail sales, and personal spending numbers were all impressive, as were consumer confidence index readings. The residential real estate market showed more momentum. Oil closed above $60 again. Emerging stock markets rallied; European equity benchmarks struggled. As all this transpired, the S&P 500 gained nearly 1%.1

DOMESTIC ECONOMIC HEALTH

On December 22, President Trump signed the Tax Cuts & Jobs Act into law. The new legislation amounted to a dramatic rewrite of key federal tax code provisions: it doubled the individual estate tax exemption to $11.2 million, raised the standard income tax deduction to $12,000, and eliminated the personal exemption as well as scores of deductions favored by taxpayers who itemize. The law also cut the corporate tax rate to 21% and permitted most pass-through businesses to take a 20% deduction on earnings. Most of these changes are scheduled to expire after 2025, unless Congress preserves them.2

The Federal Open Market Committee voted 7-2 to lift the benchmark interest rate another quarter of a point. That put the target range for the federal funds rate at 1.25-1.5%. The FOMC maintained its forecast for three rate hikes in 2018, with a consensus projection of the federal funds rate at 2.1% at the end of this year.3

As the fourth quarter ended, the third estimate of Q3 growth came in from the Bureau of Economic Analysis: a strong 3.2%, down from the prior 3.3%. In a good sign for Q4 GDP, personal spending rose 0.6% in November, with personal incomes up 0.3%. Looking ahead, the Federal Reserve’s median forecast sees the economy growing 2.5% in 2018.3,4

Speaking of growth, the factory and service sectors of the economy continued to expand nicely. The Institute for Supply Management’s manufacturing purchasing manager index came in at 58.2 for November; ISM’s non-manufacturing PMI showed a November reading of 57.4. (In October, the readings had been even higher. The factory PMI was up at 58.7; the services PMI, at 60.1.) Complementing this data, the federal government noted a 1.3% gain in hard goods orders in November.4,5

The country’s most-watched consumer confidence gauges were in good shape, though both declined in December. Economists polled by MarketWatch expected a reading of 127.5 for the Conference Board’s barometer and 97.1 for the University of Michigan’s index of consumer sentiment. The CB index fell 6.5 points to 122.1; the UMich index, 0.9 points from its preliminary December reading to 95.9.3,4

Confident consumers tend to spend freely, and that was the case during the holidays. The Department of Commerce found retail sales up 0.8% for November, and Adobe Digital Insights reported a 14.7% year-over-year rise in e-commerce sales in December.6

How about hiring? The latest Department of Labor employment snapshot showed a net gain of 228,000 jobs during November, with yearly wage growth of 2.5%. With hurricanes and floods no longer impeding payroll gains, October-November 2017 was the best two-month hiring period since mid-2016 (companies added a net 244,000 workers in the year’s tenth month). Headline unemployment remained at 4.1%, and the U-6 rate (unemployed + underemployed) was 0.1% higher at 8.0%.3,7

Headline and core inflation diverged in November: the main Consumer Price Index climbed 0.4%, yet the core CPI (minus energy and food prices) gained but 0.1%. For the year ending in November, the core CPI advanced only 1.7%; the headline CPI, 2.2%.8

GLOBAL ECONOMIC HEALTH

As 2017 ended, the European Union’s economy appeared to be stronger than it had been in some time. Its annual GDP was running at 2.5% through the third quarter, its jobless rate had fallen to 7.4% as of October, and annual inflation was at 1.8% in November. Recent developments affirm that the sovereign debt crisis is in the rear-view mirror. Burdened Greece finally had its credit rating upgraded by Fitch and Moody’s. Standard & Poor’s lifted Portugal’s credit rating from “junk” back to investment grade for the first time since 2012 and raised Italy’s credit rating for the first time since the 1980s. Even with the Brexit hanging over the eurozone’s collective head, journalists and other observers took to calling 2017 the year of the “euroboom.”9,10

While November reports on China’s factory production, business investment, and housing fell short of analyst expectations, its official manufacturing PMI did match the decent 51.6 forecast of economists surveyed by Reuters. China’s official Q3 GDP reading was released: 6.9%, topping government projections. In India, a rough economic year ended: a lingering cash shortage and a stumbling application of tax reforms helped drive the nation’s annualized GDP down below 6% at one juncture. (Economic growth had nearly reached 8% in 2016.) The International Monetary Fund has downgraded India’s 2018 growth forecast to 7.4% from 7.7%.11,12

WORLD MARKETS

Good news exceeded bad news in December. The MSCI Emerging Markets index climbed 3.36%, leaving its 2017 return at a striking 34.35%. The MSCI World advanced nicely as well – its 1.26% gain capped off a 20.11% annual rise. The Americas and the Asia-Pacific region saw many positive moves: a 3.05% gain for Brazil’s Bovespa, a 3.64% rise for Mexico’s Bolsa, and an 11.38% jump for Argentina’s MERVAL. India’s Nifty 50 added 1.63%; Canada’s TSX Composite, 1.51%; India’s Sensex, 1.35%. Australia’s All-Ordinaries gained 1.17%, while Hong Kong’s Hang Seng benchmark rose 1.00%. In Japan, the Nikkei 225 improved 0.74%. In Europe, Contrary to all this, the United Kingdom’s FTSE 100 soared 3.98%.13,14

The month’s notable declines were mainly in Europe – dips of 1.10% for the German DAX, 1.58% for the CAC 40 in France, and 2.18% for Spain’s IBEX 35. China’s Shanghai Composite lost 0.90%; Taiwan’s TSE 50, 1.58%, South Korea’s Kospi, 1.86%.14

MSCI’s Emerging Markets benchmark was not the only standout of 2017. The Hang Seng and the MERVAL, respectively, returned 37.30% and 81.57% year-over-year.13,14

COMMODITIES MARKETS

Bitcoin left cybercurrency investors queasy in December. The Commodity Futures Trading Commission approved bitcoin futures trading on the CBOE Global Markets and CME exchanges on December 1, and this new legitimacy helped the price almost double to nearly $20,000 by December 18. Then bitcoin dropped precipitously, partially recovering to $14,610 by the end of 2017’s final trading day. Turning to a different and far more stable kind of currency, the U.S. Dollar Index weakened 0.81% during December to 92.30.15,16

WTI crude ended 2017 at $60.10 a barrel, up 4.67% for December. Heating oil futures advanced 8.77% last month, and unleaded gasoline gained 3.42%; natural gas, on the other hand, slipped 2.25%. Cotton ruled ag futures with an 8.23% December improvement. Wheat gained 4.40%; corn, 2.71%. Other crops took minor or major falls: coffee lost 0.24%; sugar, 0.53%; soybeans, 3.37%; cocoa, 7.90%.17

What was gold worth at the end of 2017? An ounce was valued at $1,305.10 on the COMEX, thanks to a 2.42% December advance. Silver rose 3.79% on the month to wrap up 2017 at $16.98. Copper posted a 7.72% December gain; platinum, a 1.26% December loss.17

REAL ESTATE

Prices were high; inventory was thinner than it had been – and still, buyers found the homes they wanted. The annualized pace of existing home purchases rose 5.6% in November, and the rate of new home purchases accelerated 17.5%. The National Association of Realtors stated that resales were up 3.8% year-to-date; the median sale price was at $248,000, up 5.9% for the year. New home buying was up 22.8% year-over-year, according to the Census Bureau, with the annual increase at 31.1% in the west.18

If you found a home to buy, you probably found a cheap mortgage, historically speaking. Freddie Mac’s final Primary Mortgage Market Survey of 2018 did show rates climbing, however. In the December 28 PMMS, the average interest rate on a conventional home loan was 3.99%, up from 3.90% on November 30. In the same time frame, the average interest rate on the 15-year fixed went from 3.30% to 3.44%, and the mean interest on the 5/1-year ARM jumped from 3.32% to 3.47%.19

Now to the latest statistics on home construction. The Census Bureau reported a 3.3% gain for groundbreaking in November, with building permits down 1.4% (but there was a 1.4% rise for single-family permits).18

LOOKING BACK…LOOKING FORWARD

Blue chips led the way in December: the Dow Jones Industrial Average added 1.84% last month, far outpacing the S&P 500 (+0.98%), the Nasdaq Composite (+0.43%), and the Russell 2000 (-0.53%).1,20

As the table below notes, the Dow also recorded the best 2017 gain of the big three. (The Russell 2000 rose 13.14% on the year.) At the closing bell on December 29, the settlements were: Dow, 24,719.22; S&P, 2,673.61; Nasdaq, 6,903.39; Russell, 1,535.51.20,21

The CBOE VIX, which gauges volatility in the markets, had a poor year: it fell 21.37% to 11.04. The NYSE Arca Biotech index had a phenomenal 2017, climbing 37.31%.21

% CHANGE Y-T-D 1-YR CHG 5-YR AVG 10-YR AVG
DJIA +25.08 +24.72 +18.21 +8.49
NASDAQ +28.24 +27.09 +26.64 +15.81
S&P 500 +19.42 +18.87 +18.13 +8.08
REAL YIELD 12/29 RATE 1 YR AGO 5 YRS AGO 10 YRS AGO
10 YR TIPS 0.44% 0.55% -0.73% 1.78%

Sources: finance.google.com, wsj.com, bigcharts.com, treasury.gov – 12/29/1721,22,23,24
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.

In hindsight, we look back at 2017 and see a year that surpassed expectations. You could say the stars aligned for Wall Street: no news events truly disrupted the markets, inflation remained tame, the dollar weakened, and the economic recovery gained further momentum. Will 2018 be as great as 2017 was? Probably not, in the view of analysts. Many are predicting just a single-digit advance for the S&P 500 (Kiplinger’s Personal Finance, to cite but one forecast, projects a 2018 total return of just 8% for the benchmark). While fundamental economic indicators are strong, Fed policymakers could tighten faster if wage growth and inflation accelerate. The Fed is continuing to thin its balance sheet, and the European Central Bank seems poised to end its long-running stimulus. The last S&P 500 correction, a 14% drop, occurred in early 2016; the index is long overdue for another. If the bull market lasts into September, it will be the longest ever witnessed. Some strong headwinds could arise in 2018; prepare for some turbulence, which will arrive at some point, and be glad for the sizable stock gains of 2017.25

UPCOMING ECONOMIC RELEASES:

Across the rest of January, investors will pay attention to these news items: December’s ADP payrolls report and Challenger job-cut report (1/4), the latest employment snapshot from the Department of Labor and a new ISM service sector PMI (1/5), the latest wholesale inflation reading (1/11), the initial January University of Michigan consumer sentiment index, the December CPI and December retail sales (1/12), December industrial production (1/17), December housing starts and building permits (1/18), December existing home sales (1/24), December new home sales and the Conference Board’s latest leading indicator index (1/25), December hard goods orders, the month’s final University of Michigan consumer sentiment index reading, and the first estimate of Q4 economic growth (1/26), the December PCE price index and December personal spending (1/29), the Conference Board’s January consumer confidence index (1/30), and lastly, a policy statement from the Federal Reserve, the January ADP payrolls report, and the NAR’s December pending home sales index (1/31).

Should you have financial questions or concerns in the meantime, please contact us at 845.691.4035 to set up an appointment for a thorough review of your portfolio.

Securities offered through Securities America Inc., Member FINRA/SIPC. Advisory services offered through Focused Wealth Management Registered Investment Advisor, Philip DeAngelo, Principal. Focused Wealth Management and Securities America are separately owned companies.

Trading instructions sent via e-mail may not be honored. Please contact my office at 845-691-4035 or Securities America, Inc. at 1-800-747-6111 for all buy/sell orders. Please be advised that communications regarding trades in your account are for informational purposes only. You should continue to rely on confirmations and statements received from the custodian(s) of your assets. The text of this communication is confidential, and use by any person who is not the intended recipient is prohibited. Any person who receives this communication in error is requested to immediately destroy the text of this communication without copying or further dissemination. Your cooperation is appreciated.

The opinions and forecasts expressed are those of the author, may not actually come to pass, and are provided for informational purposes only. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.

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This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. MarketingPro, Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The Colombo Stock Exchange (CSE) is the main stock exchange in Sri Lanka. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The Hang Seng Index is a freefloat-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The Asia Dow measures the Asia equity markets by tracking 30 leading blue-chip companies in the region. Karachi Stock Exchange 100 Index (KSE-100 Index) is a stock index acting as a benchmark to compare prices on the Karachi Stock Exchange (KSE) over a period. The BSE SENSEX (Bombay Stock Exchange Sensitive Index), also-called the BSE 30 (BOMBAY STOCK EXCHANGE) or simply the SENSEX, is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE). The Korea Composite Stock Price Index or KOSPI is the major stock market index of South Korea, representing all common stocks traded on the Korea Exchange. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The S&P/ASX 200 index is a market-capitalization weighted and float-adjusted stock market index of Australian stocks listed on the Australian Securities Exchange from Standard & Poor’s. The Global Dow is a 150-stock index of corporations from around the world created by Dow Jones & Company. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The Dow Jones Americas Index measures the Latin American equity markets by tracking 30 leading blue-chip companies in the region. The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The Mexican IPC index (Indice de Precios y Cotizaciones) is a major stock market index which tracks the performance of leading companies listed on the Mexican Stock Exchange. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The FTSE MIB (Milano Italia Borsa) is the benchmark stock market index for the Borsa Italiana, the Italian national stock exchange. The IBEX 35 is the benchmark stock market index of the Bolsa de Madrid, Spain’s principal stock exchange. The RTS Index (abbreviated: RTSI, Russian: Индекс РТС) is a free-float capitalization-weighted index of 50 Russian stocks traded on the Moscow Exchange. The Europe Dow measures the European equity markets by tracking 30 leading blue-chip companies in the region. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

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