Global stock markets reached record highs during 2017. Strong corporate profits, a general upswing in domestic and global economic growth, and a year-end boost from U.S. tax reform all were positive contributors. Large-cap stocks of the Dow Jones Industrial Average closed the year with gains exceeding 28%, while the S&P 500 rose over 21%. Small-cap stocks in the Russell 2000 gained over 14%. Driven by robust performances from the technology sector, the NASDAQ gained nearly 30%. Globally, developed markets measured by the MSCI EAFE increased over 25%, and the MSCI Emerging Market Index grew over 37%.
As stock prices surged throughout 2017 and interest rates moved incrementally higher, demand for long-term bonds was minimal. The yield on the benchmark 10-year Treasury bond closed 2017 at 2.40%, declining slightly from 2.45% at the start of 2017. The Barclay’s Aggregate Bond Index generated a return of 3.5%.
The Federal Open Market Committee (FOMC) raised short-term interest rates three times during 2017. Each increase was 25 basis points (1/4 of one percent) for a total of 75 basis points. The FOMC clearly expressed its expectation that labor markets would remain vibrant and the economy would continue to grow, even though inflation has not risen as quickly as expected. The FOMC forecasts three 25 basis point rate increases in 2018, and long-term rates may finally rise if economic conditions remain robust.
Employment growth averaged a solid 175,000 per month in 2017, and 2.1 million jobs were created. Growth slowed slightly at year-end — total nonfarm payroll employment for December increased by 148,000, and revisions to October and November figures lowered earlier reports by 9,000 jobs. The unemployment rate ended the year at 4.1% versus 4.7% from one year earlier.
Manufacturing measurements were solid — the Institute for Supply Management (ISM) Index rose to 59.7 in December and the Global Purchasing Managers’ Index (PMI) rose to 54.5. The ISM Non-Manufacturing Index for December was 55.9. Index readings above 50 signal economic expansion.
New home sales climbed 17.5% in November to a seasonally-adjusted annualized rate of 733,000 units. The 109,000 increase in new single-family home sales was the largest one-month gain since July 2005. Durable goods orders increased 1.3% in November, reflecting a 6.9% increase in defense goods orders and 4.2% rise in transportation equipment orders.
While we have witnessed periodic bouts of volatility in the beginning of 2018, we encourage investors to maintain a long-term perspective of market performance. Our communication released last month, Market Volatility in Perspective, can be viewed by visiting the Knowledge Center on our website, www.jfswa.com. As always, please call us to address your questions, and make sure to apprise your advisor of any changes to your financial situation.