Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist
The year began largely as the prior one had ended – with generally sanguine views on economic fundamentals leading to rationalization of asset valuations. The boost of a significant fiscal stimulus in the form of US tax cuts also helped to stoke animal spirits in the markets. Technology stocks continued to be major beneficiaries of positive sentiment and momentum, helping propel many US indexes to record highs. After raising rates as expected in December, US Fed policymakers appeared in agreement as to the need for more increases but divided in the number of them. Sharpening the debate were signs of a nascent pick-up in inflation. Corporate M&A activity followed the positive trends of last year with particular energy in the Health Care space as the first few days of the year saw $11 billion in bids for biotech firms. After the astounding rise of cryptocurrencies in the last several months, the voices of skeptics grew louder and bitcoin entered a bona fide correction of greater than 40%. A $534 million loss at Coincheck, a Japanese cryptocurrency exchange, did not help sentiment. On the geopolitical front, a short US government shutdown had only a modest impact on markets but once again served as a reminder of the current dysfunction in US politics. Brexit negotiations inched along, and China re-affirmed a 6.5% GDP growth target for the year. The initial reading for US GDP growth for Q4 2017 was an annualized 2.6%, with the full-year value coming in at 2.3%. Eurozone GDP rose 2.5% over the last year which was the fastest pace since 2007.
The Russell 3000 Index finished the month up +5.3%, continuing the robust market performance of the prior year. Leadership came from the traditional growth sectors of Consumer Discretionary (+8.1%), Technology (+7.1%), and Health Care (+6.7%) while defensive/yield categories such as Utilities (-2.1%) and Consumer Staples (+0.8%) lagged. US small cap stocks once again failed to keep pace with large caps with the Russell 2000 Index returning +2.6% versus the Russell 1000 Index returning +5.5%. Outside of the US, the developed market MSCI World ex USA Index returned a more modest, but still healthy, +4.7% return while positive perceptions of growth and valuation in developing markets drove the MSCI Emerging Markets Index to a buoyant +8.3% return.