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December 2017 Market Review

The second longest bull market in American history continues. In a couple months we will mark the 9th anniversary of the low point for the S&P 500.  Despite the longevity, we are still bullish for several reasons. First, markets tend to overreact to good and bad news and drive stocks to unreasonable highs and depths. If we view the 2009 market low as an overreaction, then some portion of the market gains in the beginning of the bull market was just getting back to a reasonable level. Second, markets over longer periods (compared to the news cycle), reflect current and expected future economic activity. The fundamentals of economic activity in the US and abroad are strong. Lastly, we don’t see a headline hit for the market. That is the least compelling reason because they can’t be predicted. However, they often have no lasting impact on the market (Greek debt crisis, Taper Tantrum, Government Shutdown, ect). So, we remain bullish and will continue with our strategy.

Looking back on 2017, with the exception of commodities (long / short), all asset classes were positive. In US equities, growth was king with large growth first at 31% followed by mid growth at 25.6%, and small growth at 23.7%. Large value was up 15%, mid value up 13%, and small value up 8.4%. Small value started the year in first place up 39% January 2016 through January 2017.  Interestingly, mid value hangs on to the 5 year return crown at 16.9% with large growth a close second at 16.8%.

In international markets, emerging markets was the winner with a 34.3% return, beating all the US equity asset classes. However, it is still barely positive over 5 years with a 1.8% return. A very bumpy ride. Developed markets were up 24.2% with a 7.4% 5 year return.

We expect the Fed to continue interest rate increases but we think they are either priced into the market or the market will make a small adjustment afterwards. Stocks tend to do well when interest rates rise historically. The rationale is that the Fed is raising rates in a strong and growing economy which is the real reason for the stock price increase. We are hopeful that interest rates will head towards more normal levels over the next couple years.

We are ready for 2018.

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