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Overall market performance in Q4 was extremely robust, as the S&P 500 returned 7.25% on a total return basis, while the fixed income market returned 1% as measured by the Barclays U.S. Aggregate Corporate Credit Index. These overall benchmark indices are up an extremely strong 22.5% and 6.2% respectively for the year. The only episode that produced some counter trend action was in early November, as fears about tax reform failure emerged and hourly earnings data disappointed significantly versus expectations. These concerns were quickly shrugged off and positive momentum was easily regained.
On the sector front, Information Technology was once again the driver in the quarter, as has been the case throughout the year. Technology names were up over 10% in the quarter and almost 40% year-to-date led by companies such as Google, Apple, Facebook and Microsoft, which have all seen tremendous individual gains. Healthcare, Consumer Discretionary driven by Amazon and Netflix and Financials are sectors which all saw 20%+ gains for the year. The one notable turnaround in the quarter was seen in the Telecommunications Services sector, which lagged in 2017 due to strong competition and pricing pressures. In the middle of November, Verizon began an 18% rally, while AT&T pushed 14% higher indicating a turnaround in the perceived prospects for 2018.
As we move through 2018, market participants know that anticipated global monetary policy changes and accelerating intermediate term growth projections combined with tax changes here in the U.S. are significant departures from the status quo dynamics of recent years. What the market will be absorbing throughout the year will be the resulting changes on individual and corporate suite behaviors, inflation and expected future inflation dynamics, interest rates, corporate earnings, capital flows and capital market prices.
Positive Market Influences:
--Strong Intermediate GDP Trend -- We saw three straight quarters of annualized real GDP growth above 3%. Global trends are similar, which yields a strong dynamic for U.S. multinationals operating abroad.
--Subdued Inflation -- The Personal Consumption Expenditures Price Index was up 1.59% YoY, but down from 1.80% at the beginning of the year. The softening trend is good for consumers especially given reasonably positive income trends.
--Tax Reform -- Providing a tailwind to businesses and consumers, the reform package may go some way towards getting corporate decision makers comfortable with aggregate demand once again and, therefore, willing to invest in the labor and capital which should lead to productivity gains.
--Capex Recovery -- New orders for non-defense capital goods grew 3.75% over the last year. This number was running negative to the tune of mid-single digits in 2016, indicating that the dataset had troughed.
--Manufacturing Sector Strength -- The ISM Manufacturing Survey, capacity utilization rates and industrial production numbers all show a positive trending and a growing manufacturing sector.
Negative Market Influences:
--Budget Deficit -- Depending on how the long-run growth rate in the U.S. economy shakes out, there are concerns post tax reform that the budget deficit is set up to weaken in the future given the strain on entitlements due to the demographic projections in the country.
--Monetary Tightening -- Though the tightening posture of central banks around the world has been slow and incremental, there are concerns that ultimately, the waning flow of liquidity that has been provided in earnest over the recovery years will upset markets eventually.
--Weaker Wage Gains -- While aggregate income is clearly trending up as production and non-supervisory workers are being offered more hours, middle income hourly earning rates are not breaking higher to the degree that many would like. Average hourly earnings grew 2.47% YoY, but this is the slowest this measure has been in two years.
--Long-Term Growth Concerns -- At present, the global economy is performing quite well and central bankers have upgraded their near-term real growth forecasts. However, developed market demographics, crisis era bias and concerns about debt are still dampening expectations about longer-run growth.
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