Kai W. Hong, CFA
Managing Partner & Chief Investment Strategist
In the absence of any major economic or geopolitical news, investors were left to contemplate the generally sanguine and oddly complacent nature of the markets. In the US, the Republican tax plan was the main political story as people assessed both the substance of the legislation (potential elimination of various tax preferences, permanent reduction in the corporate tax rate) and likelihood of passage. Meanwhile, US Fed policy continued along the same path of gradual reduction of its balance sheet, support for periodic and modest rate increases, and copious amounts of messaging regarding this approach. The nomination of current Fed Reserve Governor Jerome Powell to be the next Fed chair was seen as a vote for continuity. The only wrinkle to the Fed’s plan was the persistence of low inflation despite tight labor markets. Outside of the US, Brexit negotiations continued to be halting with little progress made between the UK and the EU. Odds rose for a “hard” Brexit, but markets mostly shrugged it off. Employment figures were positive as the unemployment rate fell in both the US and Eurozone. Other economic measures showed continued improvement which resulted in the IMF raising its 2017 growth forecast. In China, the Party Congress cemented President Xi Jinping’s control over the country and elevated him to the level of former leaders Mao and Deng.
The Russell 3000 Index finished the month at +2.2%, marking the twelfth consecutive month of positive performance for the broad US equity market. In fact, there has only been one negative month (October 2016) in the past 20! Sector performance was dominated by Technology as the +7.6% return in that sector was double the +3.4% return of next best sector of Materials. After the brief rebound of September, US small cap stocks reverted to lagging large caps with the Russell 2000 Index returning +0.9% versus the Russell 1000 Index returning +2.3%. Outside of the US, the developed market MSCI World ex USA Index returned +1.4% while developing markets continued their strong performance for the year with the MSCI Emerging Markets Index returning +3.5%.