YEAR IN REVIEW ANNUAL FOCUS - Berthel Financial Strategies...in 2017. Stocks soared on corporate...

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2017 YEAR IN REVIEW ANNUAL FOCUS BY: KEZIA SAMUEL gf-pc.com // (800) 220-0614 Global Annual Focus - 2017 Year in Review

Transcript of YEAR IN REVIEW ANNUAL FOCUS - Berthel Financial Strategies...in 2017. Stocks soared on corporate...

Page 1: YEAR IN REVIEW ANNUAL FOCUS - Berthel Financial Strategies...in 2017. Stocks soared on corporate profits and economic growth. The rally was also fueled by the sweeping corporate tax

2017 YEAR IN REVIEWANNUAL FOCUSBY: KEZIA SAMUEL

gf-pc.com // (800) 220-0614Global Annual Focus - 2017 Year in Review

Page 2: YEAR IN REVIEW ANNUAL FOCUS - Berthel Financial Strategies...in 2017. Stocks soared on corporate profits and economic growth. The rally was also fueled by the sweeping corporate tax

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When equity markets experience the type of extended rally that we’ve seen over the past nine years, it’s very easy for investors to lose sight of the value of diversification. Not just among stocks and bonds but within each asset class as well. Investors should be focused on diversification when it comes to their investment strategy.

ANNUAL FOCUS

KEY TAKEAWAYS

While politics dominated the headlines in 2017, global recovery and earnings rebound set the tone for the record settings gains across global stock markets.

Searching for a market decline during the year proved to be a fool’s errand, while those who remained invested enjoyed a successful year. 2017 provided a reminder to us that economic expansions don’t die at a predetermined time due to old age.

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ANNUAL FOCUS

The U.S. economy ended 2017 in pretty good shape. Third quarter growth came in at a 3.2% inflation-adjusted annual rate. The unemployment rate has fallen from 4.7% at the end of 2016 to 4.1%. The last time it was this low Bill Clinton was president; that was 17 years ago. The U.S. added 2 million jobs in the past year, all of that in the private sector. Jobless claims stayed below 300,000 for the 97th straight week. This was the longest streak since 1970. Inflation remains low. Interest rates are up but still low by historical standards.

A driver of the optimism was the tax cuts of 2017 which low-ered corporate tax rate to 21% from the current 35%. The bill will enact large changes to the tax code on both businesses and households. The bill aims to increase company profits, give a small boost to the U.S. economy, cut taxes for most Americans and will cause the federal deficit to increase.

In stories outside the U.S., the global economic turnaround that started in mid-2016 continued in 2017. One of the big-gest surprises was the stability in the Eurozone after years of tumult. Eurozone’s annual economic growth rate outstripped that of the United States in the third quarter, setting up 2017 as the best year since the financial markets crashed a decade ago as per Eurostat.

A pro-business agenda was the biggest change bringing both consumer and business optimism to all-time highs during the year. The Conference Board’s measure of consumer confidence hit the highest mark in 17 years. The index takes into account American’s view of current economic conditions and their expectations for the next six months. This is an important indi-cator because consumer spending accounts for about 70% of U.S. economic activity.

A robust labor market recovery, growing export markets, an accommodative monetary stance, improving lending condi-tions and modest inflation are but a few of the tailwinds that the Eurozone is experiencing. China, the world’s second larg-est economy has defied expectations of a slowdown this year. Growth is driven due to improving global demand for its goods, sustained infrastructure spending and stronger corporate earn-ings. Chinese economic growth for the full-year is expected to increase at a rate of 6.8% according to Reuters poll, exceeding the target and accelerating for the first time in seven years.

Source: Conference Board. Bloomberg as of 12/31/17.

US Consumer Confidence Index

GLOBAL ECONOMIC SUMMARY

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GLOBAL EQUITY

By all measures, the stock markets enjoyed a stellar year in 2017. Stocks soared on corporate profits and economic growth. The rally was also fueled by the sweeping corporate tax cuts by Congress and President Trump. The Dow Jones industrial average rose 28.11%, the S&P 500 rose by 21.83% and the tech heavy Nasdaq index outshined them both with a gain of 29.64%. The S&P 500 enjoyed its second longest bull run in history. Within U.S. equities, large caps stocks outper-formed small caps on the backs of healthier global growth and a weaker U.S. dollar.

Stocks soared on corporate profits and economic growth fueled by the sweeping corporate tax cuts by Congress and President Trump.

ANNUAL FOCUS

Small cap stocks as shown by Russell 2000 index rose 14.6% and underperformed relative to the other indices in 2017.

International markets did particularly well, supported by strong economic activity abroad, with both emerging and developed markets outside the U.S. outperforming the S&P 500 in dollar terms for the first time since 2012. Developed international equity markets, as shown by the MSCI EAFE index rose 25%. The best performing equity market in 2017 was emerging mar-kets which rose 37.3%.

GLOBAL MARKETS SUMMARY

Source: Bloomberg as of 12/31/17.

40.0 %

21.8 %

14.6 %

29.6 %

2017 Index Returns

25.0 %

37.3 %

S&P 500 Russell 2000 NASDAQ Comp. MSCI EAFE MSCI EM

30.0 %

20.0 %

10.0 %

0.0 %

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In the large cap universe, as measured by the S&P 500, sector performance was mixed. Information technology was the best perform-ing stock sector for the year, up 38.8%. In 2017 all sectors except Telecom Services and Energy have positive returns. Concerns over a budding price war and whipsaws in the underlying commodity have impacted both these sectors respectively.

ANNUAL FOCUS

The CBOE Volatility index (VIX), widely considered to be the gauge of fear in the market, is a measure of the stock market’s expectations for how much prices might swing by, up or down, over a 30-day period. The higher the index, the more likely investors will be in for a wild ride.

Source: Bloomberg as of 12/31/17.

2017 S&P 500 Sector Returns

15.0 %

20.0 %

25.0 %

30.0 %

35.0 %

40.0 %

45.0 %

Info Technology

Materials Cons. Discretionary

Financials HealthCare

Industrials Cons. Staples Utilities Real Estate Energy TelecomServices

10.0 %

5.0 %

0.0 %

-5.0 %

One of the most remarkable things about 2017 was the lack of volatility; the largest intra-year decline for the S&P 500 was a mere 3% despite declines averaging over 14% during the past 37 years.

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The index whose long-term average level is around 20, has been extremely subdued this year and even fell to its record low of below 9 points.

VIX Index

FIXED INCOME

In fixed income, lower quality bonds such as high yield outper-formed the broad U.S. bond market for the fourth consecutive year while cash was once again one of the worst performers. Bloomberg Barclays U.S. High Yield index was up 7.5% while core bonds as represented by Bloomberg Barclays U.S. Agg. index was up 3.5%.

ANNUAL FOCUS

The Fed’s Fund rate was raised three times in 2017 leaving the benchmark in the range of 1.25-1.5% at the end of the year. Janet Yellen will soon be replaced by Jerome Powell and the Fed will continue its balance sheet reduction program it began in October 2017. Emerging market debt rose 8.2% as investors sought higher yielding investments.

Source: Bloomberg as of 12/31/17.

Source: Bloomberg as of 12/31/17.

8.0 %

3.5 %

6.4 %7.5 %

8.2 %

2017 Fixed Index Markets

Bloomberg Barclays U.S Agg

Bloomberg Barclays U.S Corporate

Bloomberg Barclays U.S High Yield

Bloomberg Barclays EM USD Agg

6.0 %

4.0 %

2.0 %

0.0 %

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ANNUAL FOCUS

The global oil price has recovered sharply in 2017, benefiting from increasing demand and OPEC limiting production to keep a lid on supply. Oil as indicated by the West Texas Intermediate index rose 12.5%. Geopolitical uncertainty, weaker dollar and concerns on higher debt and deficits drove gold higher in 2017. Gold rose 13.5%. Finally, global developed REITs also performed well in 2017 and posted 15% driven by strong global growth and investors seeking higher yield.

Source: Bloomberg as of 12/31/17.

20.0 %15 %

12.5 %13.5 %

2017 Alternatives

FTSE EPRA NA REITDeveloped Global

WTI - Oil Gold

15.0 %

10.0 %

5.0 %

0.0 %

The global oil price has recovered sharply in 2017, benefiting from increasing demand and OPEC limiting production to keep a lid on supply.

REAL ASSETS

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Global economic growth should remain strong in 2018, as both developed and emerging economies enjoy a synchronized upturn. A key growth driver is likely to be higher corporate capital expenditure fueled by tax cuts of 2017, paired with an accommodative Fed, a healthy U.S. energy sector and increased business and consumer spending should all continue to drive economic growth. In addition, the risk of a recession remains low as the new Fed is expected to continue to raise interest rates slowly.

With the overall growth outlook firming, business sentiment rising, labor markets tightening, we expect a relatively good year. Yet, there are always risks as well, which include geopo-litical tensions with North Korea, Fed potentially miscalculating on the pace of interest rate hikes, as well as valuations for equi-ties and fixed income assets are stretched in many areas, all of which could lead to higher market volatility.

2018 OUTLOOK

We believe that investment decisions will need to be based on even more precise analysis and a highly disciplined deci-sion-making process. When equity markets experience the type of extended rally that we’ve seen over the past nine years, it’s very easy for investors to lose sight of the value of diversifi-cation. Not just among stocks and bonds but within each asset class as well.

Investors should be focused on diversification when it comes to their investment strategy.

2018 SUMMARY OUTLOOK

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ANNUAL FOCUS

DEFINITIONS

• All indexes are unmanaged, and an individual cannot invest directly in an index. Index returns do not include fees or expenses.

• �The�Standard�&�Poor’s�500,�often�abbreviated�as� the�S&P�500,�or just the S&P, is an American stock market index based on the market� capitalizations�of�500� large� companies�having� common�stock listed on the NYSE or NASDAQ.

• Russell 2000 The Russell 2000 Index is a small-cap stock market index�of�the�bottom�2000�stocks�in�the�Russell�3000�Index.�The�Russell 2000 is by far the most common benchmark for mutual funds�that�identify�themselves�as�“small-cap”.

• The NASDAQ Composite is a stock market index of common stocks and� similar� securities� (e.g.� ADRs,� tracking� stocks,� and� limited�partnership interests) listed on the NASDAQ stock market. Along with the Dow Jones Industrial Average and S&P 500, it is one of the three most-followed indices in US stock markets.

• The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East.

• The MSCI Emerging Markets Index is an index created by Morgan Stanley�Capital�International�(MSCI)�designed�to�measure�equity�market� performance� in� global� emerging�markets.� It� is� a� float-adjusted�market�capitalization�index�that�consists�of�indices�in�23�emerging economies.

• The Bloomberg Barclays US Aggregate Bond Index is a broad-based�flagship�benchmark�that�measures�the�investment�grade,�US� dollar-denominated,� fixed-rate� taxable� bond� market.� The�index includes Treasuries, government-related and corporate securities,� MBS� (agency� fixed-rate� and� hybrid� ARM� pass-throughs),�ABS�and�CMBS�(agency�and�non-agency).�

• The Bloomberg Barclays US Corporate Bond Index measures the investment�grade,�fixed-rate,�taxable�corporate�bond�market.�It�includes�USD�denominated�securities�publicly�issued�by�US�and�non-US�industrial,�utility�and�financial�issuers.

• The Bloomberg Barclays US Corporate High Yield Bond Index measures�the�USD-denominated,�high�yield,�fixed-rate�corporate�bond�market.�Securities�are�classified�as�high�yield�if�the�middle�rating�of�Moody’s,�Fitch�and�S&P�is�Ba1/BB+/BB+�or�below.

• The Bloomberg Barclays Emerging Markets Hard Currency Aggregate� Index� is� a� flagship� hard� currency� emerging�markets�debt benchmark that includes USD-denominated debt from sovereign, quasi-sovereign, and corporate EM issuers.

• �The� FTSE� EPRA/NAREIT� Global� Real� Estate� Index� Series� is�designed to represent general trends in eligible real estate equities�worldwide.�

• �West�Texas�Intermediate�(WTI),�also�known�as�Texas�light�sweet,�is a grade of crude oil used as a benchmark in oil pricing. This grade� is�described�as� light�because�of� its�relatively� low�density,�and sweet because of its low sulfur content.

• The Gold Spot Price is the current market price at which an asset is bought or sold for immediate payment and delivery.

• �The�Bloomberg�Dollar�Spot�Index�(BBDXY)�tracks�the�performance�of a basket of 10 leading global currencies versus the U.S. dollar.

• The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force.

• �Jobless� claims,� refers� to� the� number� of� people� who� are� filing�or� have� filed� to� receive� unemployment� insurance� benefits,� as�reported by the U.S. Department of Labor.

• �The�U.S.�consumer�confidence�index�(CCI)�is�an�indicator�designed�to�measure�consumer�confidence,�which�is�defined�as�the�degree�of� optimism� on� the� state� of� the� economy� that� consumers� are�expressing�through�their�activities�of�savings�and�spending.

• �VIX�is�the�ticker�symbol�for�the�Chicago�Board�Options�Exchange�(CBOE)�Volatility�Index,�which�shows�the�market’s�expectation�of�30-day�volatility.�It�is�constructed�using�the�implied�volatilities�of�a�wide�range�of�S&P�500�index�options.

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This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion of our investment man-agement team at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no indication of future performance. The author has taken reasonable care to help ensure that the information is accurate.

Some of the data used including data for indices, charts and graphs, has been obtained from third party providers. The data is believed to be reliable and is subject to revision. The commentary is given for informational purposes and is not a solicitation to buy or sell a security or strategy. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. GFPC has taken reasonable care to help ensure that the infor-mation is fairly presented. Diversification does not protect against loss.

Investment advisory services offered through Global Financial Private Capital, LLC.

Securities offered through GF Investment Services, LLC.

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