In 2017, once again, the investment strategy of maintaining discipline and holding for the long term won out over reacting to media forecasts and predictions from speculators. In January 2017 CNBC suggested Wall Street was the most bearish they’d been in 12 years, as it turned out, the global economy continued to strengthen as share markets posted solid returns on low volatility.
In the fourth quarter, defeats in US Senate contests struck fear into Republicans about 2018 mid-term elections and they quickly agreed to the long talked about Trump tax reform bill. Markets rallied with big tax cuts ahead for corporations. US employment data remained strong, but was distorted by the effects of hurricane season.
As was widely anticipated, the US Federal Reserve lifted interest rates by 25 basis points in December. The Fed also raised its growth forecasts for 2018 to 2.5% from 2.1%.
In the Eurozone, data showed the economy continuing to recover. The unemployment rate fell to 8.8% in October, the lowest rate since January 2009. In October, the European Central Bank announced that quantitative easing would be extended to September 2018 but that the pace of purchases would be reduced from the €60 billion per month currently down to €30 billion.
Despite a sluggish economy, the Bank of England’s monetary policy committee raised interest rates for the first time since November 2007, from a record low of 0.25% back to 0.50%. Annual consumer price index inflation reached 3.1% in November, breaching the BoE’s upper target.
The Bank of Japan’s quarterly Tankan survey recorded the strongest sentiment among large manufacturing companies for more than 11 years. Despite slightly disappointing economic numbers seen in November, virtually all the data released in December exceeded expectations. The Japanese unemployment rate declined to 2.7%, a new low for this cycle, while the number of people employed extended the rising trend seen throughout 2017.
In December, the Reserve Bank of Australia (RBA) said the local economy was growing around its trend rate of 3%, with employment and investment strengthening. Activity was being supported by low interest rates and public investment in infrastructure. The RBA said one continuing source of uncertainty, however, was the outlook for household spending, with income growth slow and household debt levels remaining high.
The Bloomberg Commodities index pushed ahead +4.7% in the fourth quarter, underpinned by a rally in industrial metals and energy. Nickel (+22%) and copper (+12%) and iron ore (+12%) posted the strongest gains as Chinese demand remained firm. In the energy sector, Brent crude surged +18.2%, driven by an agreement among OPEC, and non-member countries such as Russia, to extend production cuts throughout 2018.