No durable disruptions to trade. Belying the fears of some, the Trump administration did not disengage from the North American Free Trade Agreement, declare China a currency manipulator, or cancel free-trade pacts with countries such as South Korea. It did exit the Trans-Pacific Partnership negotiations, but this agreement was still a work in progress and had not had any notable impact on trade. Instead of disengaging from existing trade agreements, the U.S. nudged its partners to pursue fairer international trade practices, reinforcing rather than undermining the pro-growth policies it pursued elsewhere.
No spike in inflation. Despite the sharp decline in the unemployment rate and a year of impressive net job creation, neither wage growth nor the inflation rate took a meaningful leg up. This lack of price pressure perplexed many economists, went against what history would predict, powered a market response with the notion of “Goldilocks” growth, and contained market concerns about excessive Fed policy tightening.
No selloff in U.S. government bonds. The lack of inflationary pressure was one of the factors helping to explain a government bond market that defied expectations again. The persistence of low and stable yields reinforced the general market risk-taking appetite, underpinned by the notion that, with the Bank of Japan and the ECB remaining ultra-dovish, the central banking community would remain investors’ BFF.
No dollar appreciation. After the notable appreciation into the start of 2017 and the resulting cautionary statements by President Donald Trump about excessive currency strength, the dollar remained relatively weak for most of the year even though the Fed raised rates, the U.S. adopted pro-growth measures, the economic expansion broadened, and the tax bill encourages the repatriation of corporate profits held abroad. In addition to lowering trade tensions, this removed a headwind to U.S. growth and reinforced the feel-good factor concerning corporate profits.
No bitcoin regulatory crackdown. Despite some worrying that the historic surge in bitcoin prices was a bubble that would end up bursting and hurt most small investors, there was very little regulatory backlash against a phenomenon that some also believe is empowering illegal activities. This reinforced a more general view that the regulatory pendulum has now swung solidly, heralding a period of general deregulation.
No contagion from Puerto Rico or Venezuela. Although both Puerto Rico and Venezuela missed contractual payments on their bonds, neither event created contagion in the municipal and emerging-market segments, let alone more broadly. Investors treated both events as isolated and as constituting no threat of adverse spillover.
No geopolitical shock for markets. North Korea continued its brazen threats of nuclear attack throughout most of 2017, including on New Year’s Eve. Yet markets continued to ignore the risk almost all year, betting -- correctly -- that provocative words would remain just that and not translate into actions that would disrupt markets during the year.
No OPEC disintegration. Despite the pressure earlier in the year of low oil prices, Qatar-related tensions within the Gulf Cooperation Council, and various Iran-Saudi proxy wars, the operational discipline of the OPEC cartel was not eroded. If anything, it strengthened during the year. That, together with effective cooperation with Russia and other non-OPEC producers, allowed oil prices to withstand competitive pressures from shale and end the year at levels not seen since December 2014. This gave an important boost to energy stocks, reversing their large underperformance during the first half of 2017.
The failure of these nine threats to materialize contributed to 2017’s strong annual performance for risk assets. Together, they turbocharged a rally powered by improving economic prospects, strong corporate profitability and ample liquidity. After closing the books on a great year, investors now need to assess the durability of this unusual combination of things that did and did not happen.
Happy New Year and best wishes for a happy, healthy and successful 2018.