The 2017 Stock Market Review

Let’s review the highlights about why 2017 was an extraordinary year in the markets.

Strength and consistency were the key qualities of U.S. stocks in 2017. There was very little volatility, especially downside volatility.

There wasn’t a meaningful period of decline in 2017, and there really has not been one since early 2016. The price level of the S&P 500 fell in only one calendar month in 2017 — March. And that decline was only 0.04%. When dividends are included to tabulate the total return, the S&P 500 didn’t have a negative month in 2017 and hasn’t had a negative return for 14 consecutive months.

Unlike most years, there wasn’t a day that had a greater than 2% move, either up or down. Many international markets had higher returns than the U.S. indexes in 2017, but those markets are in the early stages of recoveries from bear markets.

The surge in U.S. markets during 2017 is a continuation of the upward march from the bottom after the financial crisis. Over the last five years, most international markets and indexes have returned 66% or less. Brazil, Mexico and Russia still have double-digit-percentage negative returns. But most of the major U.S. indexes have returned around 100% in the last five years.

Larger companies, especially growth and technology companies, dominated the U.S. stock surge in 2017. The Nasdaq 100 had the highest return, over 34%. (It is up 570% since the market bottom in 2009.)

The S&P 500 returned around 22% for the year. But the S&P 500 Growth index returned about 28% compared to 15% for the S&P 500 Value index.

Likewise, the technology sector of the market returned 36%. The next closest sectors were industrials and health care, both around 23%.

The surge in technology companies has distorted the sector weightings in the S&P 500 Index. Tech stocks now are by far the biggest component of the index: 23.91%. Health care and financials are the next largest, with around 14% each. In the 1990s, the sectors were fairly evenly distributed.

In 2017, technology increased its share of the index by 3.14 percentage points, while energy lost 1.72 points and consumer staples lost 1.19 points. Technology is 8.36 percentage points above its average weight over 27 years, while energy is 3.48 points below its average.

The bottom line is if you’re invested in the S&P 500 index today, you’re making a big bet on technology and growth stocks.

The valuation of the index still is high by historical standards. But the valuation, using the trailing price-earnings ratio, still is well below the peaks before both the technology stock crash and the financial crisis. The valuation remained fairly steady in 2017 despite the surge in stock prices, indicating that stock prices generally rose in line with reported earnings.

As I’ve been saying, there’s no reason to believe a major stock market decline is imminent. We’re overdue for a pullback or correction, but bull markets don’t die of old age. Fundamentals in the economy and the stock market support current prices, and it’s likely the economy will continue to grow and support higher stock prices into 2018.

The Data

Continuing last week’s positive housing reports, new home sales rose 17.5% for the month, the largest monthly increase in 25 years. The three-month increase is the strongest since 2003. Some of the sales were the result of discounts; the median price decreased 0.3%. Over 12 months the median price increased 1.2% and sales increased 26.6%.

The S&P Corelogic Case-Shiller Home Price Index rose a solid 0.7% in October. In addition, September’s gain was revised substantially higher to 1.0% from 0.5%. That puts the 12-month price rise at 6.4%.

The Pending Home Sales Index from NAR is out of line with other data. It showed only a 0.2% increase for the latest month and is up only 0.8% over 12 months. By comparison, existing home sales reported last week were at the highest level since the financial crisis.

Consumer Sentiment, as measured by the University of Michigan, is down for the second month in a row to 95.9. But the October reading of 100.7 was the highest of the recovery, so the current measure still is very strong.

Personal Income had another solid, unspectacular 0.3% increase. Wages and salaries increased 0.4%. But Consumer Spending rose 0.6% for the last month. Part of that increase was due to a spike in gasoline prices. Other than that, most of the spending increase was for services. The additional spending was financed by a reduction in savings, with the savings rate coming in at the lowest level since November 2007.

The PCE Price Index, the Federal Reserve’s preferred measure, rose only 0.2%. The core PCE (excluding food and energy) increased only 0.1%. Over 12 months, the measures have increased 1.8% and 1.5%, respectively.

Durable Goods Orders for the month require careful reading. The headline number was a significant 1.3% increase, but that was skewed by a large number of airline orders. The important core capital goods segment declined 0.1%. But last month’s 0.5% decline in core capital goods was revised to a 0.8% increase. Over 12 months, core capital goods increased 8.1%. Over the last few months, core capital goods orders are solid, and recent surveys and corporate announcements indicate businesses are likely to invest more in core capital goods in the coming months.

The Kansas City Fed Manufacturing Index was 14, down from 16. That’s a very strong reading and indicates growth in the region continues.

The Dallas Fed Manufacturing Survey also was strong, jumping 10 points to 29.7 from an already-strong 19.4. New orders were especially positive. Other factors indicate this level of strength isn’t sustainable, such as long delivery delays, higher prices of inputs and increased hours worked.

The Richmond Fed Manufacturing Index declined to 20 from 30. But last month’s measure was the highest since 1993. The latest reading still indicates strong growth but shows the same signs of unsustainability as the Dallas survey.

The Chicago Purchasing Managers Index, which has been very strong in the last half of 2017, soared to 67.6 from 63.9. That’s a six-and-one-half-year high. The weakness in the survey was employment, because many respondents say they are having trouble finding qualified job candidates.

New unemployment claims were unchanged for the week. The week’s data isn’t very reliable, because the holiday caused 15 states to estimate their data, and next week’s data probably won’t be reliable either.

The Markets

The S&P 500 rose a modest 0.11% for the week ended with Wednesday’s close. The Dow Jones Industrial Average increased 0.17%. The Russell 2000 returned 0.21%. The All-Country World Index added 0.45%. Emerging market equities rose 1.71%.

Long-term treasuries returned 2.12% for the week. Investment-grade bonds rose 1.03%. Treasury Inflation-Protected Securities (TIPS) added 0.83%, while high-yield bonds increased 0.39%.

The dollar declined 0.29%.

Energy-based commodities rose 2.67% for the week. Broader-based commodities added 2.77%. Gold increased 1.89%.

Bob’s News & Updates

Do you want to know what’s in the new tax law? I discuss the details in my next Retirement Watch Spotlight Series webinar. I’ll review the changes and, more importantly, what they mean to you. I discuss which strategies no longer are viable, which still work and some new strategies to consider. I also cover what tax reform is likely to mean for your investments.

You can watch these seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

I hope you’ll join me at the MoneyShow Orlando. I’ll be giving several presentations, as will some of my Eagle Financial Publications’ colleagues and dozens of other financial experts. It’ll be February 8-11, 2018. Click here for details.

Most retirees leave a lot of money on the table by not carefully considering how and when to take their Social Security benefits. Avoid that mistake by educating yourself about the choices. Start with my report, Secrets to Boosting Social Security Benefits.

Give that middle-aged (or older) person in your life a holiday gift they’ll benefit from. You should give them the revised edition of “The New Rules of Retirement”