Equity Market 2017 Review: Global Performance and Trends

The equity market in 2017 was a wild ride, with some surprising twists and turns. The global market saw a significant surge in performance, with the MSCI ACWI Index rising by 21.6% year-over-year.

The US market led the charge, with the S&P 500 Index gaining 21.8% and the Dow Jones Industrial Average increasing by 25.1%. This was largely driven by the economic growth and tax cuts implemented by the new administration.

Emerging markets also saw significant gains, with the MSCI Emerging Markets Index rising by 32.3%. This was largely due to the economic growth and reforms implemented in countries such as China and India.

Global equity markets posted a strong year in 2017, with the S&P 500 Index recording a 21.83% total return and small cap stocks returning 14.65%.

The Russell 2000 Index, which measures small cap stocks, returned 14.65%, above its long-term average return of 11.73% since 1979.

Non-US equity markets performed even better, with the MSCI World ex USA Index logging a 24.21% return and the MSCI Emerging Markets Index a 37.28% return, making it the fifth highest return in the index history.

A 37.28% return is a significant gain, and it's a reminder that the global equity markets can be unpredictable at times.

The S&P 500 Index has a long history, dating back to 1926, and its performance over the years is a useful guide for investors.

From 1926 through 2017, the frequency of positive 12-month returns following a new index high was similar to what is observed following months of any level.

In fact, almost a third of the monthly observations were new closing highs for the index during this time period.

This data shows that new index highs have historically not been useful predictors of future returns, which is an important lesson for investors.

In 2017, developed ex US markets and emerging markets generally outperformed US equities. The S&P 500 Index's 21.83% return was its best calendar year since 2013, but the US ranked 35th out of 47 countries in the MSCI All Country World Index (IMI).

The US was not alone in its subpar performance, as 45 out of 47 countries posted positive returns. Country level returns were dispersed even among those with positive returns, with developed markets ranging from +10.36% in Israel to +51.39% in Austria.

China's 2017 return of over 50% (USD) is a prime example of the noise in year-to-year single country returns, as it followed a flat-to-negative return (USD) in 2016.

US markets had a mixed performance in 2017, with small cap stocks underperforming large cap stocks and value stocks underperforming growth stocks.

The Russell 2000 Index, which tracks small cap stocks, provided a 14.65% return in 2017, but the US small cap premium was negative, ranking in the lowest third of annual return differences since 1979.

US value stocks returned 13.19% in 2017, but growth stocks performed even better, with a 29.59% return, making 2017 the fourth lowest year for value since 1979.

High profitability stocks outperformed low profitability stocks in 2017, with a positive profitability premium.

This underperformance of value stocks is not unusual, as we can see from the example of the 10-year period ending in March 2000, where value stocks underperformed growth stocks by 5.61% per year.

A diversified approach is essential in investing, especially when it comes to the US market, where country level returns were dispersed even among those with positive returns.

In 2017, the US ranked in the bottom half of countries for the year, placing 35th out of the 47 countries in the MSCI All Country World Index (IMI).

In 2017, emerging markets saw small cap stocks underperform large cap stocks, and value stocks underperform growth stocks. This was a reversal from 2016 when the size and value premiums were generally positive across global markets.

Small cap stocks in emerging markets returned 28.07% as measured by the MSCI Emerging Markets Value Index, but growth stocks fared better returning 46.80% using the MSCI Emerging Markets Growth Index.

The value premium, measured as MSCI Emerging Markets Value Index minus MSCI Emerging Markets Growth Index, was the lowest since 1999. Despite this, high profitability stocks outperformed those with low profitability in emerging markets.

Maintaining discipline to these parts of the market is the key to effectively pursuing the long-term returns associated with the size, value, and profitability premiums. This is especially important in emerging markets where country level returns were dispersed even among those with positive returns.

In emerging markets, returns ranged from -24.75% in Pakistan to +53.56% in Poland—a spread of almost 80%.

The 2017 equity market was a remarkable year, with major equity indices in the US, developed ex-US, and emerging markets posting strong returns for the year.

Despite predictions of a weaker market, investors saw a broad global advance, with the S&P 500 Index returning 21.83%, its best calendar year since 2013.

This strong performance was not limited to the US, as 45 out of 47 countries in the MSCI All Country World Index (IMI) posted positive returns.

The global equity markets defied predictions in 2017, with major indices in the US, developed ex-US, and emerging markets posting strong returns for the year.

Developed ex-US markets and emerging markets generally outperformed US equities, making a market cap-weighted global equity portfolio outperform a US equity portfolio.

The S&P 500 Index returned 21.83%, its best calendar year since 2013, but the US ranked in the bottom half of countries for the year, placing 35th out of 47 countries in the MSCI All Country World Index.

45 out of 47 countries posted positive returns, with country level returns dispersed even among those with positive returns. In developed markets, returns ranged from +10.36% in Israel to +51.39% in Austria.

In emerging markets, returns ranged from -24.75% in Pakistan to +53.56% in Poland, a spread of almost 80%. This large dispersion in returns emphasizes the importance of maintaining a diversified approach when investing globally.

China's return of over 50% in 2017 highlights the noise in year-to-year single country returns, making it one of the best performing countries for the year after a flat-to-negative return in 2016.

Fixed income markets performed well in 2017, with the Bloomberg Barclays US Aggregate Bond Index gaining 3.54% and the Bloomberg Barclays Global Aggregate Bond Index (hedged to USD) gaining 3.04%.

The yield curve was upwardly sloped in many developed markets, indicating positive expected term premiums. This was reflected in the positive realized term premiums both globally and in the US.

Credit spreads were relatively narrow during the year, indicating smaller expected credit premiums. Realized credit premiums were positive both globally and in the US.

Corporate bonds were the best performing sector, returning 6.42% in the US and 5.70% globally. This was reflected in the Bloomberg Barclays Global Aggregate Bond Index (hedged to USD).

The yield on the 3-month US Treasury bill increased 0.88% to end the year at 1.39%. The yield on the 10-year US Treasury note decreased 0.05% for the year to end at 2.40%.

Interest rates increased in Germany, while remaining relatively unchanged in the United Kingdom and Japan. Yields on Japanese and German government bonds with maturities as long as eight years finished the year in negative territory.