Fourth Quarter 2017: Bitcoin Steals the Show, but Doesn’t Ruin the Plot
The final quarter of 2017 was a microcosm of the year as a whole; every major asset class was up around the globe, and nearly all sectors and regions were as well. For the first time in history, the S&P 500 rose in every single month of the calendar year, accompanied by historically low volatility. In US markets, investors continued to prefer growth-oriented and larger-capitalization companies. Global markets continued to expand as emerging markets posted the strongest gains; in contrast to the US, smaller companies outgained larger names. Almost 1,700 companies made initial public offerings in 2017, the most since the financial crisis, with a resurgent US and emergent China leading the way.
US GDP expanded modestly for the year, echoing the world economy, which also continued to grow. All 45 countries tracked by the Organization for Economic Cooperation and Development grew in 2017, with the majority seeing accelerating growth. In the US, job growth remained strong and the unemployment rate continued to tick down below Federal Reserve projections. Export growth, helped by a weakening dollar, grew by more than 5% in the third quarter after 6% and 7% growth in the first two quarters, respectively.
Divergent monetary policy paths between the US and the rest of the world are evident in sovereign bond markets. The Federal Reserve judged the US economy robust enough to raise rates for the 5th time since the financial crisis and reiterated a path of “policy normalization” (gradual reduction) of its balance sheet. Stimulative monetary policies from Japan and the European Central Bank, on the other hand, have put downward pressure on global interest rates. This policy has helped keep a lid on long-term Treasury rates, which ended the year approximately where they were five years ago. The combination of rising short-term rates and stubbornly low long-term rates created a significantly flatter yield curve.