Market Recap: Higher Asset Prices and Little to No Volatility | Fourth Quarter 2017
In a Nut Shell: The past year will be remembered for its extremes. There was no shortage of drama from a geopolitical standpoint, yet global stock and bond markets generally ignored it, producing impressive gains with historically low volatility. While bond market returns were not overly exciting, they were probably close to the high end of what most market participants expected, given the low starting point for yields. Equities were the clear outlier on the upside and produced outsized gains across the globe due to the strong economic and earnings backdrop. Real assets like commodities and REITs were laggards, but still managed to stay in positive territory for the year.
For an in-depth look at the market for the quarter just ended, read below.
The fourth quarter continued the year-long theme of higher asset prices and little to no volatility. This lack of volatility, particularly in equities, will define much of the past year for investors and industry professionals. Economic growth not only accelerated over the course of the year, but was more broadly based than usual, resulting in strong asset markets across the globe and across asset classes as can be seen in the below figures.
Equity markets appeared to remain disconnected from all the geopolitical noise during 2017 except when it was a positive. Negative events were ignored and positives celebrated, leading to numerous “firsts” for volatility and returns. As one can see in the chart below, the VIX (a gauge of equity market volatility) sat for much of the year around 10 and averaged just 11.1. Historically that 10 level had acted as an unofficial and arbitrary floor and the longer term VIX average has been 20.7. Directly correlated with that consistently low volatility is that we experienced no meaningful selloffs throughout the year. Typically, equity markets experience at least some weakness during the course of the year with the average intra-year drawdown (high point to subsequent low point) since 1980 of greater than -14%. The most significant drawdown in 2017 was just -2.8%. Since 1980, only 1995 had a lower intra-year drawdown.
As we’ve alluded to, returns for equities were impressive across the globe. There were a few pockets of weakness from a sector standpoint (Energy and Telecom) and growth stocks handily outpaced value, but otherwise returns were strong and impressively consistent. The S&P 500, for example, accomplished something it has NEVER done before. It was positive every calendar month during 2017 and in fact has now been positive for a remarkable 14 months in a row (as shown below)!
Given the starting point of low yields and tight credit spreads, the return outlook for bonds over the course of 2017 was never overly exciting. The best case scenario was that we’d see returns in-line with bond yields and perhaps see a bit of tightening on the spread side. Many, however, feared we’d start to see bond yields move higher (reducing return) and potentially widening credit spreads (further reducing returns). Fortunately we experienced something that closely resembled the best case scenario. The BarCap Aggregate Bond Index returned 3.5% as longer term rates remained steady despite several short term rate increases by the Federal Reserve (3 during 2017, including 1 in mid-December). The double-edged sword aspect of the past year and yields is that we enter 2018 with that same low initial yield and same hopes around best and worst case scenarios.
Commodities and REITs
Energy prices were a bit of a mixed bag as oil prices continued their recovery while natural gas levels fell during the quarter and for the year. Oil bottomed in mid-June in the low 40s, but has staged a nice recovery finishing the year above $60/barrel. Natural gas, however, finished the year close to its lowest levels over that period. Certainly a positive trend for heating homes over the winter, but not for businesses focused on natural gas production. Precious metals, primarily consisting of gold, was down slightly on the quarter. Publicly traded REITs were positive for the quarter and year, but sold off towards the end of the year erasing larger gains.
If you’d like more information or have questions about how the low volatility and higher asset prices will affect the year for investors, please contact Brad Swinsburg 404-874-6244.
Explore more information on the fourth quarter of 2017 by visiting these links:
Unless stated otherwise, any estimates or projections (including performance and risk) given in this presentation are intended to be forward-looking statements. Such estimates are subject to actual known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those projected. The securities described within this presentation do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in such securities was or will be profitable. Past performance does not indicate future results.