Market Monitor: December 2017
Twice a month, we send clients this overview of the markets and roundup of key economic news stories. Similar to Altair Insight, it enables us to share our big-picture views while also highlighting select market returns and developments that we feel are important.
Headlines and Highlights
- $1.5 trillion tax bill becomes law: President Donald Trump signed into law the largest overhaul of the U.S. tax code in three decades, reducing the corporate tax rate to 21 percent from 35 percent and cutting individual rates across the board. It also imposes new limits on deductions used heavily in high-tax states and doubles the exemption amount for estate, gift and generation-skipping taxes, among other changes.
- Stocks close out strong 2017 on the rise: Large U.S. stocks had their best calendar-year returns since 2013 and international stocks fared even better as major indexes finished the year at or near record highs. A rebounding global economy, corporate earnings growth and the U.S. tax overhaul all helped push stocks higher.
- Oil’s surge propels commodities to annual gain: U.S. crude oil prices rose 5 percent in December to their highest level in more than two years after OPEC-led production cuts were extended to the end of 2018. The rally lifted commodities to a second straight positive year, although the benchmark iPath Bloomberg Commodity ETN still finished last among major asset classes with a 0.7 percent return.
Selected Market Returns
Sources: Morningstar, Altair Advisers
- The improving world economy provides a solid foundation for the markets entering 2018. Corporate profits growth was positive in 2017 in the United States, emerging markets and developed international markets for the first time since 2010 and is forecast to expand further this year. Global growth should continue to rise with earnings robust in every region.
- We need to see more growth and inflation in order to justify the three additional rate increases that Fed officials have projected for 2018. While the Fed has shown appropriate caution up to this point, overtightening monetary policy with too many interest rate hikes or more aggressively reducing its balance sheet may spell trouble for the markets and cause us to position more defensively.
- Global central banks continue to be ineffective in their efforts to raise inflation. Market analysts have overestimated the potential for higher inflation for years, and we still do not yet see evidence of an imminent surge in either inflation or yields.
- U.S. stocks are likely to encounter more turbulence this year, perhaps including the first 10 percent correction in almost two years. However, a boost to corporate profits from the new tax law, rising GDP growth and persistently low yields provide strong potential to ultimately push stocks higher in 2018.
- International stocks continue to have a positive outlook after outperforming the U.S. market for the first time in five years in 2017, thanks in part to the weaker dollar. Italian elections in March and geopolitical tensions involving North Korea and Iran pose risks, but recent statements of continued support from central banks in Europe and Japan have affirmed markets’ solid prospects for the near term.
The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice.