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Market Research - December 11, 2017

2017 U.S. Market: A (Brief) Year in Review

Running with the bulls

2017 has seen major U.S. Index highs, atypically high growth in numerous sectors and industries, and growing concerns about a market pullback after this record run.

With only a few weeks remaining in the calendar year, the S&P 500 is up over 18%, though the NASDAQ Composite and Russell 1000 Growth Index lead the way, with year-to-date returns of 27% and 26%, respectively.

All indices above, with the exception of the NASDAQ Composite and Russell 1000 Growth Index, currently sit at all-time highs, with the two aforementioned indices at levels near their all-time high. Advisors have had plenty of opportunities to achieve fantastic returns, though mitigating risk will certainly be top of mind as this massive bull market continues to run and concerns surrounding an overvalued market linger.

As we examine the economy, it’s important to note how major market segments have contributed to 2017’s bull market.

Of the five major U.S. Sector ETFs, four have year-to-date price returns greater than 16%, with the only exception being Energy (XLE), which is down 8.83%. Leading the way in 2017, XLK, the Technology sector ETF, is up 32% on the year.

Trump’s economy and a new-look Fed

While down slightly year-to-date, U.S. consumer sentiment remains quite high after a year under the Trump Administration; additionally, the U.S. Unemployment Rate has dropped nearly 13% this year, and U.S. Commercial Bank Loans have increased by nearly 50%.

While these leading indicators certainly give a positive outlook on economic health, a changing of the guard at the Federal Reserve and interest rate uncertainty could contribute to larger market changes.

Since the Mortgage Crisis, interest rates have remained low, with periodic rate hikes being cautiously implemented by Janet Yellen as a means of keeping pace with inflation and maintaining healthy labor conditions. These low rates and strategic hikes have led to healthy lending and borrowing activity, higher consumer spending, and consistently higher company earnings. Yellen’s commitment to gradual hikes, with a target level of 1–1.25%* according to CNBC, have since prompted a large economic recovery without overheating.

In order to temper growth and avoid inflation levels that could put the market at risk of a large pullback, Yellen has cautiously advised the Fed and her successor, Jerome Powell, to continue to “gradually move our policy rate toward what [Yellen would] call a neutral level, which would be consistent with sustainably strong labor market conditions.” Powell, who was called upon by Trump to take over as Chairman of the Federal Reserve, sees a longer-run overnight rate of 2.5%, according to the same CNBC article.

*Current Overnight Federal Funds Rate is 1.16%

As is commonly understood, higher rates lead to lower levels of borrowing and consumer spending, as well as lower bond prices, due to demand for higher yields. This relationship between rates and the bond and stock markets is demonstrated in the following chart:

Changes in the advisory landscape and looking ahead to 2018

As mentioned in a recent YCharts post on the positives and negatives of robo-advisors, the investment advisory landscape should continue to change shape and adapt throughout 2018.

At YCharts, we continue to see consistent themes in how our clients are adapting to current market conditions and preparing for the future. A common shift in strategy is the flight to low-cost ETFs — particularly “smart-beta funds,” which typically track an index, but rebalance based on various factors in order to generate above-market returns. The Financial Times also noted a 2000% rise in money allocated to these funds in the first quarter of 2017.

While investing in smart-beta funds is considered a mix of passive and active investing, investment advisors sticking to an active strategy similarly are using factor-based modeling or rebalancing in order to generate alpha. These investors continue to search for reliable, customizable data and software to identify growth and momentum factors — including new, alternative datasets.

Ultimately, we cannot accurately predict the future of the market in 2018. Yet, investment advisors can control their use and understanding of data, current market conditions, changes in monetary and fiscal policy, and segment trends through disruptive technology and services.

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