The opening week of the new year witnessed strong global market performance, as all major U.S. equity indices set new highs. For as strong as domestic market performance was last week, international markets were even stronger, as the MSCI® EAFE gained 2.82%, and the MSCI Emerging Market Index added 4.11%. Technology shares led the domestic advance last week tacking on 4.24%, followed by a 3.94% recovery for energy shares. Only the utility sector lost ground last week, slipping 2.5% as investors fear state utility commissions will insist that utility companies share any windfall from lower taxes with consumers. The consumer staples group continues to struggle, closing out the week with a nominal 0.11% gain, extending the sector’s six months of underperformance that began with Amazon’s announcement of its purchase of Whole Foods. Fixed income markets experienced some modest selling pressure, sending the yield on the ten-year Treasury bond up to a 2.476% yield, closing in on the 2017 high of 2.497%. Commodity prices greeted 2018 with an extension of the 2017 rally as well, with energy, agricultural, precious and industrial metal prices posting gains of 1% or better.
Despite last year’s strong performance, foreign stocks, as illustrated in the first exhibit, are still trading at lower valuation levels relative to that of the S&P 500® Index. Historically, this has not been the case and is especially noteworthy now as both developed and emerging foreign markets have, and are forecast to post stronger profit growth than the U.S. market. On the issue of valuation, in the second chart you can see that while we have not yet reached the previous peak, we are rapidly closing in. I cannot stress strongly enough the need to address asset allocation as well as other risk factors, such as credit quality, term structure and style exposure.
Source: All statistics herein obtained from Bloomberg.
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