GLOBAL WEEKLY COMMENTARY

Lessons from 2017

Dec 18, 2017

Key points

  • We draw lessons from a year that saw surprisingly large returns, including on the role of steady growth, low volatility and political risk.
  • Major developed market central banks raised their 2018 growth forecasts last week, while several emerging market central banks tightened policy.
  • China’s decision this week on a 2018 growth target may shed further light on its policy priorities. U.S. tax reform faces a self-imposed deadline.

The past year turned out to be more bullish than we anticipated. Consensus growth expectations caught up to ours and global earnings jumped – but the magnitude of asset returns surprised us. Most asset classes have performed well, with many delivering double-digit returns, as shown in the chart below. The events many worried about in early 2017 – including the election of a far-right government in France and aggressive U.S. trade policy – didn’t materialize. The MSCI ACWI closed at a record high 61 times, and 30-day realized volatility of the S&P 500 Index hit its lowest level since the early 1960s. Other surprises: Inflation fell and long-term bond yields were flat even as the economy improved, while cryptocurrencies posted huge returns.

2017 asset performance in U.S. dollars

2017 asset performance in U.S. dollars

Past performance is no guarantee of future results. It is not possible to invest directly in an index.
Sources: BlackRock Investment Institute with data from Thomson Reuters, December 2017.
Notes: The data are as of Dec. 13, 2017. U.S. Treasuries performance is based on the total return of the Datastream 10-Year Benchmark Index. Global high yield credit and global investment grade credit performance are based on the total return of Merrill Lynch indexes. Emerging market debt performance is based on the total return of the J.P. Morgan EMBI Global Diversified Index. Equity performance is based on the total return of MSCI indexes in U.S. dollars. Global momentum equities performance is based on the MSCI All-Country World Momentum Index. The U.S. dollar performance is based on the DXY trade-weighted index.

As good as it gets?

The big stock market winners in 2017 include emerging market and Asian equities, the momentum style factor (stocks trending strongly higher in price) and the technology sector. The lesson here: Sustained, above-trend economic growth has helped companies deliver on earnings, fueling strong equity returns. All major regions increased earnings at a clip faster than 10%, Thomson Reuters data show. We expect more good things in 2018, but 2017 earnings performance will be a harder act to follow.

Two other lessons: First, low volatility can be sustained for longer than many expect. Our research shows that equity market volatility tends to stay low in steady economic expansions, provided systemic financial vulnerabilities remain in check. We see no such risks on the horizon at present, notwithstanding pockets of froth in the credit markets. Second, geopolitical risks are not all created equal. It’s worth taking the time to look through what may be excessive market fears. This was our approach to Europe. The French presidential election result put fears of a eurozone breakup to rest, a “soft Brexit” appears to be emerging, and the eurozone has managed to eke out the fastest growth since March 2011. But a tougher U.S. stance to trade still looms as a major threat to the global free-trade regime.

The final lessons? Low bond yields are not just about the Fed, and currencies can be wildcards. U.S. 10-year yields are broadly flat, 30-year yields lower, and the U.S. dollar down for the year - even as the economy improved, and the Fed raised rates and announced it would start shrinking its balance sheet. A soft patch in inflation is partly why. We see this dynamic reversing in 2018 as U.S. core inflation rises back above 2%. Yet we also see structural factors, including a post-crisis rise in global savings, as capping long-term rates as the Fed presses ahead with further rate rises in 2018. The bottom line: 2017 was a near-perfect year for risk assets. What’s ahead? View our 2018 Global Investment Outlook. The Weekly commentary will resume on January 8. Happy holidays!

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Date:Event
Dec. 18-20 China Central Economic Work Conference
Dec. 19 Germany Ifo Business Climate Survey
Dec. 21 Bank of Japan rates decision; eurozone consumer confidence flash; Catalonia election
Dec. 22 UK Q3 GDP; U.S. Q3 core PCE, durable goods orders, government funding expires

China maps out its 2018 economic agenda next week. Its decision on whether or not to revise the current 6.5% growth target – or even to de-emphasize such growth targets altogether – will help signal whether the country’s currently tight policy mix is consistent with its growth dynamics. China’s economic activity data were mixed in November, and point to a slowdown in GDP growth in the first quarter. Elsewhere, Republicans in the U.S. Congress face a self-imposed deadline of December 22 to pass tax reform, the same day a temporary government funding measure expires.

  • The Fed raised its policy rate by a quarter percentage point, as was widely expected. It revised up its 2018 growth forecast to 2.5% from 2.1%. U.S. long-term bond yields fell, while bank shares’ momentum was derailed. The European Central Bank revised up its gross domestic product (GDP) forecast for 2018 to 2.3% from 1.8%.
  • U.S. core consumer inflation rose less than expected. A U.S. small business optimism index hit a 34-year high. Eurozone flash PMIs beat forecasts. A Democratic win in Alabama cut the Republican U.S. Senate majority to 51-49.
  • Central banks in China, Mexico and Turkey raised rates. Brazil’s Congress delayed a vote on pension reform until February.

Global snapshot

Weekly and 12-month performance of selected assets

 

EquitiesWeekYTD12 MonthsDiv. Yield
U.S. Large Caps 0.9% 19.5% 18.3% 1.9%
U.S. Small Caps 0.6% 14.2% 13.5% 1.1%
Non-U.S. World 0.3% 23.9% 25.2% 2.9%
Non-U.S. Developed 0.1% 22.3% 23.9% 3.1%
Japan 0.1% 22.3% 22.2% 2.0%
Emerging 0.7% 32.3% 33.2% 2.5%
Asia ex-Japan 0.5% 37.7% 36.7% 2.4%
BondsWeekYTD12 MonthsYield
U.S. Treasuries 0.3% 2.5% 3.4% 2.4%
U.S. TIPS 0.2% 2.6% 4.3% 2.3%
U.S. Investment Grade 0.5% 6.5% 7.9% 3.2%
U.S. High Yield 0.0% 7.3% 7.9% 5.7%
U.S. Municipals -0.1% 5.3% 6.3% 2.3%
Non-U.S. Developed 0.5% 9.6% 11.6% 0.7%
Emerging Market $ Bonds 0.4% 10.1% 11.4% 5.2%
CommoditiesWeekYTD12 MonthsLevel
Brent Crude Oil -0.3% 11.3% 17.0% $63.23
Gold 0.6% 9.5% 11.3% $1,256
Copper 4.8% 24.4% 20.1% $6,886
CurrenciesWeekYTD12 MonthsLevel
Euro/USD -0.2% 11.7% 12.8% 1.17
USD/Yen -0.8% -3.7% -4.7% 112.60
Pound/USD -0.5% 7.9% 7.3% 1.33

Source: Bloomberg. As of December. 15, 2017.
Notes: Weekly data through Friday. Equity and bond performance are measured in total index returns in U.S. dollars. U.S. large caps are represented by the S&P 500 Index; U.S. small caps are represented by the Russell 2000 Index; Non-U.S. world equity by the MSCI ACWI ex U.S.; non-U.S. developed equity by the MSCI EAFE Index; Japan, Emerging and Asia ex-Japan by their respective MSCI Indexes; U.S. Treasuries by the Bloomberg Barclays U.S. Treasury Index; U.S. TIPS by the U.S. Treasury Inflation Notes Total Return Index; U.S. investment grade by the Bloomberg Barclays U.S. Corporate Index; U.S. high yield by the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index; U.S. municipals by the Bloomberg Barclays Municipal Bond Index; non-U.S. developed bonds by the Bloomberg Barclays Global Aggregate ex USD; and emerging market $ bonds by the JP Morgan EMBI Global Diversified Index. Brent crude oil prices are in U.S. dollars per barrel, gold prices are in U.S. dollar per troy ounce and copper prices are in U.S. dollar per metric ton. The Euro/USD level is represented by U.S. dollar per euro, USD/JPY by yen per U.S. dollar and Pound/USD by U.S. dollar per pound. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Past performance is not indicative of future results.

Asset class views

Views from a U.S. dollar perspective over a three-month horizon

Table: Asset class views from a U.S. dollar perspective

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Richard Turnill
Global Chief Investment Strategist
Richard Turnill, Managing Director, is Global Chief Investment Strategist for BlackRock, leading the Investment Strategy Function within the BlackRock ...
Isabelle Mateos y Lago
Global Macro Strategist, BlackRock Investment Institute
Isabelle Mateos y Lago, Managing Director, is a global macro investment strategist in the Investment Strategy team of the BlackRock Investment Institute. The ...
Kate Moore
Chief Equity Strategist, Americas
Kate Moore, Managing Director, is Chief Equity Strategist – Americas for BlackRock and is a member of the BlackRock Investment Institute. She is responsible for ...
Jeffrey Rosenberg
Chief Fixed Income Strategist
Jeffrey Rosenberg, Managing Director, is BlackRock's Chief Investment Strategist for Fixed Income. His responsibilities include working closely with the Chief ...