2018 Global Asset Allocation

2017 Year in Review

The S&P 500’s outperformance streak versus international markets came to an end in 2017, with both developed and emerging equity markets outperforming the US, and emerging markets leading all major asset classes. Emerging markets rose 37% with developed markets up 25%. Synchronized global growth, stabilizing oil prices, and a weaker dollar provided an improved backdrop for overseas markets. Among the strongest emerging markets, were China, South Korea, and India. Europe and Japan also benefited from improving global growth.
US Equities also had an excellent year with a 22% return for 2017, the ninth consecutive year of positive returns. Growth stocks outpaced value stocks, the reverse of 2016. Sector leadership also reversed compared to 2016 with higher-growth sectors (e.g. Information Technology, Consumer Discretionary, and Health Care) providing some of the strongest returns. The Energy and Telecommunications sectors, which led returns in 2016, were materially behind the broader market.
Intermediate US bonds returned 2.3%, as the yield curve noticeably flattened during 2017. Short rates (1 year) moved from 0.9% to 1.8% while longer rates (10 year) were essentially unchanged at 2.4% over the last 12 months. High-yield bonds followed up a strong 2016 with a 7.5% return in 2017 driven by the compression of credit spreads to just 3.5% over Treasuries, the lowest level in 3 years.
The alternative asset class returns were in line with expectations. Higher risk directional strategies had a better year in 2017, but did not keep pace with global equity markets given their lower net market exposure. Lower risk absolute return strategies performed as expected and outpaced bond market returns. Commodity returns were positive at 6% and benefited from improving energy market dynamics. Gold also had a positive year up 13%.