The bull market continued for another year, causing market indices to soar to new heights over and over again and—ominously—also pushing valuations further beyond the long-term averages. A breakdown shows that just about everything gained in 2017. The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—rose 6.39% for the 4th quarter, finishing the year up 20.99%. Looking at large cap stocks, the widely-quoted S&P 500 index of large company stocks gained 6.12% during the year’s final quarter and overall returned 19.42% gains in calendar 2017.
Meanwhile, the Russell Midcap Index finished the 2017 calendar year up 18.52%. As measured by the Wilshire U.S. Small-Cap index, investors in smaller companies posted a 13.45% return for 2017.
International stocks also participated in the bull run. The broad-based EAFE index of companies in developed foreign economies gained 21.78% in dollar terms. In aggregate, European stocks were up 22.13% in 2017, while EAFE’s Far East Index gained 23.37%. Emerging market stocks of less developed countries, as represented by the EAFE EM index, posted a remarkable 34.35% gain for the year.
Looking over the other investment categories, real estate, as measured by the Wilshire U.S. REIT index, finished the year up a respectable 4.18%. The S&P GSCI index, which measures commodities returns, finished the year up 5.77%.
In the bond markets, coupon rates on 10-year Treasury bonds have risen incrementally to 2.41%, while 30-year government bond yields have fallen slightly to 2.74%. Five-year municipal bonds are yielding, on average, 1.70% a year, while 30-year munis are yielding 2.62% on average.
This was a year when investors ignored the dire headlines, North Korean missile threats, investigations of the Presidency, hurricane devastation and a rapidly-growing national deficit to produce one of the smoothest investment rides in the past century. In October, the S&P 500 index broke its all-time record of consecutive days without a 3% drawdown. The biggest single-day drop in 2017 was just under 2%.
How long can this continue? Who knows? The S&P 500 is now trading at around 18 times forward earnings, which is above the historical average of 16. Loosely translated, this means you aren’t getting a bargain when you buy stocks today. At the same time, we are experiencing low unemployment rates and solid profits for American companies. The U.S. economy is growing at a 3% rate. And the psychology of the markets doesn’t match what you traditionally see at market tops: people still seem to be suspicious about how long the market rally will last, unlike the normal buying frenzy that often presages the next sharp downturn. (If you want to see what a market frenzy looks like, just pay attention to the current bitcoin craze.)
Eventually, there will be a broader bear market which will see most stocks lose value. It will be impossible to spot by forecasters but will seem inevitable with the benefit of hindsight. The important thing to remember is that few people have ever become extremely wealthy by timing the market and jumping out because they think they can predict the next downturn. Many have gotten significantly wealthier by holding on whenever the raft hits the rapids. We had no rapids in 2017, but everybody knows they’re coming—someday, though perhaps not soon. Let’s make sure we have a tight grip anyway.
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Wilshire index data: http://www.wilshire.com/Indexes/calculator/
Russell index data: http://www.ftse.com/products/indices/russell-us
Nasdaq index data:
International indices: https://www.msci.com/end-of-day-data-search
Commodities index data: http://us.spindices.com/index-family/commodities/sp-gsci
Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/
This article is for informational purposes only. This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer or financial professional. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.