2017 Q4 Market Review


Once again in quarter four of 2017, markets delivered positive results across all major asset classes to close out the year.  While International Developed Markets fell behind the performance of U.S. Domestic Equities when comparing quarter three with quarter four; Emerging Markets outperformed all equity markets for the third quarter out of four.  In the U.S., profit growth continued for corporations, tax cuts were fulfilled in December, and the GDP of the U.S. grew at 2.6%, slowing due to an increasing rate of imports.

In international developed economies, Eurozone GDP grew by 2.4% in quarter four and 2.5% for 2017, which was its best performance in more than a decade.  In addition, the Euro has continued its upward trend, and updating quarter three’s article, consumer confidence sentiment rose even higher than its previous 16 year high in September of 2017.


Domestic Equities

Returns for the different size and style of domestic equities differed quite a bit in quarter four of 2017.  The returns ranged from 4.50% for Small Cap Value equities  to 7.47% for Large Cap Value equities.  For 2017, Large Cap Growth equities were the top performing equity sub-asset class (27.83%) while Small Cap Value was the worst performing sub-asset class (9.59%).

For the domestic equity indicies used in IFA portfolios, the quarterly return was 5.25% for Q4.  This was in line with the US Market (as measured by the Russell 3000 Index), which returned 5.32% over the same time period.


International (Developed) Equities

While not as strong as quarter three, equities from developed countries that are outside the United States had a positive fourth quarter.  In Q4, results ranged from 3.83% for International Small Cap Value equities to 5.43% for International Value equities.  When looking at the 2017 returns, the year had very strong results ranging from 26.09% (International Value Equities) to 30.24% (International Small Cap Equities)

For the blend of international indices used in the IFA Index Portfolios, the return was 4.62% in Q4.    This was in line with the international developed market as a whole (as measured by the MSCI World ex US All Cap Index), which delivered a return of 4.51%.

Returns by country in Q4 ranged from -2.90% (Sweden) to 9.28% (Singapore). Top performing countries included Singapore (9.28%), Japan (8.53%), Australia (7.43%), United Kingdom (5.85%), and Israel (4.45%). The worst performing countries included Sweden (-2.90%), Italy (-2.12%), Finland (-1.80%), Spain (-1.02%), and Belgium (-0.95%).


Emerging Markets

Emerging Markets had the strongest quarter of all equity asset classes, finishing of what was a banner year for the asset class.  For Q4, the returns ranged from 7.22 for Emerging Markets Large equities to 8.58% for Emerging Markets Small Cap equities.  For 2017, returns have ranged from 33.76% (Emerging Markets Value equities) to 36.57% (Emerging Markets Large Equities).

For the blend of emerging markets indices used in IFA Index Portfolios, the return for Q4 was 7.99%.  Our blend outperformed the Emerging Markets as a whole (as measured by the MSCI Emerging Markets Index) during Q4 which delivered a 7.44% return in Q4.

Returns by country in Q4 ranged from -9.32% (Pakistan) to 20.91% (South Africa). Top performing countries included South Africa (20.91%), India (13.41%), Korea (12.86%), Greece (10.69%), and Malaysia (8.29%). Worst performing countries included Pakistan (-9.32%), Mexico (-8.36%), United Arab Emirates (-3.56%), and Brazil (-1.91%).


Real Estate

Global Real Estate once again delivered positive results in Q4.  International REITs outperformed the domestic REIT market with a return of 3.72% while U.S. REITs delivered a 2.06% Q4 return.


Fixed Income

Interest rates in US income markets increased during Q4, resulting in a change in return for our Fixed Income positions. In Q4, the 30-year US Treasury rate decreased 12 basis points (2.86%-2.74%) while the 5-year US Treasury made a significant move of 47 basis points (1.74%-2.21%).

For Q4, the four fixed income funds used by IFA delivered mixed returns ranging from -.52% for Short Term Government bonds to .05% for 1-Year Bonds.

For the blend of fixed income used in the IFA Index Portfolios, the return was -.17% for Q4.  This is what we would expect in a rising interest rate environment.  If interest rates rise, the value of bonds will diminish because investors can get a higher rate of return on newly issued bonds with the same maturity that are currently being offered in the market.


IFA Index Portfolios

The returns of the IFA index portfolios are shown below net of the maximum .90% advisory fee for the 2017 final returns numbers.

What investors need to remember is that there will always be periods in which their IFA Index Portfolios will underperform in the short-term. This is the very nature of taking risk. Given the recent underperformance in U.S. Small Cap Value stocks compared to U.S. Large Cap Growth stocks, many investors may be wary about their asset allocation. The chart below shows rolling period return of the IFA U.S. Small Cap Value Index versus the IFA U.S. Large Cap Growth Index. Over any given month, the odds of U.S. Large Cap Growth stocks outperforming are slightly less than a coin flip. But once we expand our view to longer time horizons, you can see that a disciplined approach yields favorable results for the globally diversified investor.  (see the interactive chart below)


Each Quarter, IFA monitors the funds they recommend for clients and as part of that process, we’ve developed a rating system. Below is a link to our Performance Monitoring Report for client portfolios: IFA 4th Quarter 2017 IFA Client Performance Monitoring Report.

We recently created the IFA Index Funds Investing Kit that includes a copy of Index Funds: A 12-Step Recovery for Active Investors book, the documentary, as well as The Random Walker, which simulates market outcomes based on fair prices right before your very eyes. You can find both through Amazon.