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Stocks extended their advance in the fourth quarter of 2017 as tax reform underpinned hopes for improved economic growth. All of the major indices hit record highs. The NASDAQ’s outperformance relative to the broader S&P 500® Index continued, albeit at a more moderate pace. The more conservative areas of the market, including food and beverage companies, household products, and Utilities lagged; here, investor strategies which had prioritized high dividends during the extended period of ultra-low interest rates fell out of favor. Small cap stocks underperformed large caps for the third time in four years. The popular FAANG group of leading technology stocks (Facebook, Amazon, Apple, Netflix and Google) had another stellar year even though their momentum stalled over the final two months. These results are reflected in the strong outperformance of the NASDAQ-100 Index in comparison to other indices. Bond yields remained stubbornly low even as the Federal Reserve continued to raise interest rates.
Ed Apple: Markets continue to set new highs; what makes them so strong?
Charles: The main reason the markets continue to advance is the absence of a major destabilizing event. In each of the past five years, something has disrupted the markets: the Brexit vote in 2016; the Greek bailout negotiations in 2015; the Russia-Ukraine conflict and oil market selloff in 2014. Back in 2013, it was the surge in Treasury yields as the Federal Reserve announced a slowdown in its bond purchase program (the so-called “Taper Tantrum”); and, in 2012, it was the European debt crises and “fiscal cliff” showdown over expiring tax cuts and budget cutbacks. This year, no major event has hindered stocks from moving higher.
The bull market continued to climb on the strength of improving U.S. and global economies. Companies across many sectors cited improving business conditions in support of their willingness to invest in product and geographical expansions, acquisitions and other growth initiatives. The market leadership continued to focus on the Technology sector which contributed almost 40% of the S&P 500® Index’s 9.34% return through June 30th; Apple, Alphabet, Microsoft, Facebook, Amazon.com, and Johnson & Johnson led the way with performance ranging from 17% to 31% during the quarter. Investors continued to be attracted to these companies, despite their lofty valuations, as geopolitical uncertainties cast a shadow over the anticipated growth opportunities elsewhere. A look at the other market sectors reveals more modest contributions: Industrials contributed (9.7%); Financials (11.0%) while Energy (-10.6%) lagged during the first six months.