U.S. equities markets have rallied to very strong gains in 2017. The 20.5 percent total return (including dividends) of the S&P 500 index through November was notable in that not only has the index delivered positive total return in each quarter of the year, but also in each of the first 11 months. Should the S&P 500 hold or extend its gains through December, 2017 will represent the strongest year for equities since 2013, and the ninth consecutive year of gains since the large decline in 2008.
In our view, one of the big surprises of the 2017 investment year has been the strength of the rally in U.S. equities. To begin the year, very few market forecasts anticipated even double-digit S&P 500 returns, let alone returns exceeding 20 percent! Our initial 2017 forecast published in December of last year was for a 7 percent total return. We attribute the year’s strong gains to four powerful factors that have driven strong investor confidence and demand for equities. Those factors are 1) stronger than expected earnings growth, 2) U.S. GDP growth that has accelerated from a lackluster 2016, 3) improving global economic activity, and 4) continued low interest rates compared to historical levels. As 2017 approaches year-end, each of those factors remains firmly intact, and should provide support for continued investor confidence to begin 2018.
Looking back at the year we have identified nine investment surprises that went against consensus. In addition, as we formulate our 2018 forecasts, we have listed several potential surprises for 2018.
2017 Surprises
1. Equity markets rallied globally. This was not just a U.S. rally as major markets across Europe, emerging markets, Japan, China and Latin America all have increased in double-digits.
2. Market volatility has been historically low. In 2017, the largest peak-to-trough pullback in the S&P 500 was 1.7 percent in mid-August. Since the beginning of 2009, there have been 10 periods of market pull-backs of at least 5.5 percent (more than one per year) with an average decline of 10.8 percent. Many investors expected higher volatility after the election of President Trump.
3. Growth stocks have far outpaced value stocks in 2017. 2017 has been the strongest year for growth vs. value since 2009. This surprised many investors as value stocks ended 2016 on a roll after surging following the November Presidential election.
4. Technology stocks have led the market rally. The tech sector has far outpaced other industry groups while also beating the market the past three years. In 2017 through early December, the S&P 500 Technology sector gained 37.0 percent, well above the #2 sector’s (Health Care) 20.9 percent gain.
5. Through November, no major legislation has been passed by the U.S. Congress. Despite gaining control of both the Federal Government’s Legislative and Executive branches in November 2016, Republicans have been unsuccessful agreeing to major legislation. After years of Washington gridlock, hopes were high. Hopes remain high for tax reform before year-end.
6. Geopolitical tensions, natural disasters and terror attacks have not derailed investor confidence.