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Tuesday, November 14, 2017

Financial Focus - One Year After: An Annual Review of the Market

Last week marked the one-year anniversary of the U.S. presidential election. The uncertainty heading into Election Day gave way to a steady market rally. While the election outcome is not the sole catalyst for what has transpired over past 12 months, it has nevertheless been a positive year for investors. Here are a few of the highlights:
  • U.S. stock market sets new highs – The S&P 500 returned 23.7% since the election, the best performance in the first year of a presidential term since 1989 (George H.W. Bush). The market set 59 new record highs in 2017, reflecting rising investor confidence and earnings growth of 9.4% through the first three quarters of the year.
  •  The economy has gained some traction – U.S. GDP growth has averaged 2.4% in the first three quarters of 2017, including two consecutive quarters of 3% growth for the first time since 2014. This is not to the singular credit of the election outcome, as this growth is not simply a legislative reaction. That said, rising consumer confidence, deregulation and the prospects of a fiscal boost (tax reform) have helped the prospects of economic expansion.  Over the past year, the unemployment rate has fallen 0.7% to 4.1%, a 17-year low, supporting household spending (the largest contributor to U.S. GDP).
  • Rates move higher – The Fed has raised rates three times over the past year – the most rate hikes in a 12-month span since '04-'05 -- in response to the healthier economic backdrop. Ten-year yields also rose to nearly 2.4%, having been below 1.9% on election day.
  • Global diversification has been rewarded – Looking at asset-class performance in the year following the election, while much of the attention (and political drama) has been centered on the U.S., it was international investments that led the way.  The three of the four best performing asset classes were overseas, including Int'l small- and mid-cap equities (+28.8%), emerging-market equities (+28.6%) and int'l developed-market large-cap equities (+25%). U.S. small-cap (+25.6) and large-cap (+23.7) also delivered strong gains. This leadership is reflective of the synchronized global economic rebound that gained shape over the last year.  The gains in small-caps may also partly be reflecting some expectations for corporate tax reform.
  • Sector performance reflects cyclical optimism – The four sectors that performed the best since the election have been technology (+41.7%), financials (+33.5%), materials (+26.7%) and industrials (+23.5%). The outperformance of these cyclical industries signals the improved optimism around the outlook for economic growth and potentially higher interest rates.
As we look ahead to the next year and beyond, we think investors should prepare for the following:
  1. Higher volatility, including the potential for a short-term correction in the stock market. To prepare, consider proactively rebalancing your mix of stocks and bonds to your long-term target.
  2. More moderate returns. Stocks have delivered an average annual return of 16% over the past five years.  We think the bull market in equities can continue, but with more moderate returns ahead.
  3. Gradually rising rates.  We believe the Fed will continue slowly increasing short-term rates and winding down its monetary stimulus. As the economy expands and labor conditions tighten, we expect inflation to increase gradually, leading rates moderately higher over time.
  4. Additional leadership rotation. We think broad diversification will continue to be rewarded as asset-class leadership shifts in response to progressing economic trends, policy changes and periodic disruptions. 
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor, which in Prescott is Jeremy Raverty. The local Edward Jones office in Prescott is located at 1400 N. Acres, Suite 55.

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