2017 Review & January Economic Update
A Look Back at 2017
The last month of 2017 was the year’s most newsworthy in terms of financial events. Congress reformed federal tax law to a degree unseen since the 1980s, the Federal Reserve raised the benchmark interest rate, and bitcoin took its investors for a wild ride. Economic indicators such as hiring, retail sales, and personal spending numbers were all impressive. In addition, consumer confidence remains high, the residential real estate market showed more momentum, and oil rose above $60 a barrel. By the end of the month, the S&P 500 gained nearly 1%. (1)
The stock market gains for 2017 were impressive: S&P 500 +19.42%; Dow Jones Industrial Average +25.08; Nasdaq +28.24%. The stars seemed to have aligned for Wall Street: inflation remained tame, the dollar weakened, and the fundamental economic growth yielded considerable momentum. Notably absent last year was volatility where the VIX fell -21.37% and ended the year at historic lows in spite political spectacles and the North Korean threat. (2,3)
The markets welcomed another reason to rally as President Trump signed the Tax Cuts & Jobs Act into law on December 22nd. The new legislation amounted to a dramatic rewrite of key federal tax code provisions: it doubled the individual estate tax exemption to $11.2 million, raised the standard income tax deduction to $12,000, and eliminated the personal exemption as well as scores of deductions favored by taxpayers who itemize. The law also cut the corporate tax rate to 21% and permitted most pass-through businesses to take a 20% deduction on earnings. Most of these changes are scheduled to expire after 2025, unless Congress preserves them. (4)
What Will 2018 Bring?
In hindsight, we look back at 2017 and see a year that surpassed expectations. In the view of many analysts, 2018 is will likely not be a repeat. While fundamental economic indicators are strong, Fed policymakers could tighten faster if wage growth and inflation accelerate.
All of that being said, no one could have predicted the tremendous returns seen in last year, and if the bull market lasts into September, it will be the longest ever witnessed. At some point, turbulence will arise and we will be thanking the sizable returns of 2017.