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%.

Steven Pinker’s latest book, “Enlightenment Now: The Case for Reason, Science, Humanism and Progress,” posits that the prevalence (and allure) of negative news undermines the amazing progress humanity is making. Nowhere is this more true than the public markets, where the most recent bout of volatility focused the minds of investors (and clients alike) more so than ever, overshadowing the remarkable trebling of the stock market since its lows less than 10 years ago.

Read the book review in The Economist

Kari offers her thoughts on the #metoo movement from the perspective of a small business owner. In light of the fact that many small businesses operate without an official HR department, issues may arise without proactively leadership.

Read the full article in The Harvard Business Review

We are finally seeing articles about how higher costs for labor, commodities, and raw materials are affecting companies.  It’s likely that earnings expectations were just too rosy and the market has adjusted to a more realistic outlook on profit margins.

Read the full article in The Wall Street Journal

When index funds comprise 40% of all trades, and they are only selling, with less traders active (not passive), there are fewer bids on the other side, forcing prices down even further.  This is an obvious, but very real, hazard of passive investing trends.

Read the full story in The New York Times

Here is an article from The Economist that details the dangers of structured products, such as Credit Suisse’s XIV which collapsed spectacularly last week. Banks like to sell these products to institutional and high net worth clients because they generate fees for the banks and often times are not well understood by the clients – as was likely the case with the XIV.

Read the full article in The Economist

The many problems with GE’s financial reporting has made it difficult for both managers and investors of GE alike to assess the health of the conglomerate. At Aureus, we feel it’s important provide clear and concise client reporting so that both ourselves and our clients are able to properly assess their current financial situation and have the necessary information to plan accordingly for their future. We think it may behoove GE to do the same for their investors.

Read the full article in The Economist

Why can’t wages climb?  Because huge companies buy out competitors and then cap salaries to insure that profitability rises, justifying the purchase price.  True in everyone in every industry, including farm-equipment mechanics.

Read the full article in The New York Times

Kari offers her recent views on the market in an article she published for CNBC. She highlights the importance of cynicism in a rising market to protect clients from permanent loss of capital.

Read the full article on CNBC.com

If the HuffPost is dropping their non-paid contributors, costs go way up, signaling the inevitable end of free access to websites like this.  They must believe that readers will pay for content. If not, can they survive on advertising?  After 30 years, we are about to find out who can generate profitability in digital media.

Read the full article in The New York Times