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Fourth Quarter Investment Commentary

Looking Back: 2017 Market Review

The fourth quarter capped yet another stellar year for U.S. stocks. Larger-cap U.S. stocks (Vanguard 500 Index) gained 6.6% for the quarter and ended the year with a 21.7% total return. This was the ninth consecutive year of positive returns for the index. The market’s 1.1% gain in December crowned 2017 as the first year ever that stocks rose in each and every month. The broad driver of the market’s rise for the year was rebounding corporate earnings growth, supported by solid economic data, synchronized global growth, still-quiescent inflation, and accommodative monetary policy. U.S. stocks got an additional catalyst in the fourth quarter with the passage of the Republican tax plan, presumably reflecting investors’ optimism about its potential to further boost corporate after-tax profits, at least over the shorter term.

Foreign stock returns were even stronger, with developed international markets gaining 26.4% (Vanguard FTSE Developed Markets ETF) and emerging markets up 31.5% for the year (Vanguard FTSE Emerging Markets ETF). In the fourth quarter, however, these markets couldn’t match the S&P 500, gaining 4%–6%.

Moving on to bonds, the core bond index fund (Vanguard Total Bond Market Index) gained 3.5% in 2017. This return was close to the index’s yield at the start of the year, as intermediate-term interest rates changed little during the year with the benchmark 10-year Treasury yield ending at 2.4%. Although the Federal Reserve raised short-term rates three times (75 basis points total), yields at the long end of the Treasury curve declined and the yield curve flattened. Corporate bonds across all credit qualities and maturities had positive returns. High-yield bonds gained 7.5% (ICE BofA Merrill Lynch U.S. High Yield Cash Pay Index) and floating-rate loans rose 4.1% for the year (S&P/LSTA Leveraged Loan Index). Investment-grade municipal bonds (Vanguard Intermediate-Term Tax-Exempt) rebounded from a flat 2016, returning 4.5%.

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