In this latest installment of our quarterly report, my colleagues and I share some observations on the fourth quarter of 2017 and offer our outlook for the economy and markets. Click here to go to the full report on our website. Following are a few highlights:
- The S&P 500 and other major indexes hit new highs throughout 2017. The S&P 500 index returned 21.8%, including dividends, its best performance since 2013, and delivered a positive return in every month for the first time. Foreign stocks, led by those in emerging markets, performed even better than those in the United States as they also benefited from the global economic expansion and low interest rates.
- The U.S. economy continued to expand and added more jobs during the fourth quarter for a total of 2.1 million new jobs during the year, compared to 2.2 million added in 2016. Unemployment in December was a low 4.1% for the third consecutive month.
- Investors applauded the many positive earnings surprises announced during each quarter of the year and the resulting 18% surge in S&P 500 annual operating earnings (including fourth quarter estimates). Anticipation of potential positive benefits in future years from large corporate tax cuts and reduced regulation also boosted markets.
- The multiple of earnings investors were willing to pay for stocks increased only slightly during the year, the first pause in the multiple’s steady increase since 2011. The S&P 500 index now trades for approximately 19 times projected 2018 operating earnings, though earnings estimates may increase as analysts factor in the positive impact of the new tax bill.
- The Fed currently intends to raise rates three times this year. Inflation is perhaps the most important factor impacting the timing of the Fed’s moves. Though inflation remains below the Fed’s target of 2% per year, we believe the tightening job market will soon lead to increasing wages as businesses compete to hire more employees.
- The recently enacted U.S. tax cuts have lifted business optimism and should increase corporate earnings. We expect corporations to boost dividends and repurchase shares with the additional cash resulting from lower taxes and profits brought back to the United States from overseas.
- Overall, we are optimistic regarding the U.S. and foreign stock markets, but we also know that we are long overdue for a correction (decline of 10%-20%) in stock prices. Fortunately, we currently see few of the typical signs of investor overconfidence that have preceded past market tops.
Jordan Smyth and the Edgemoor Investment Advisors Team