In the simplest terms, a lot went right for markets in 2017, as an almost “Goldilocks” scenario
of open markets, ongoing global central bank accommodation (notwithstanding the Fed’s hikes
and balance sheet reduction) and largely inflation-free economic growth combined to propel risk
assets higher. Most U.S. macroeconomic data points were decidedly positive to end the year,
reflected in improving measures of job creation, retail sales, industrial production, and capacity
utilization. Further fueling animal spirits, the political apparatus in Washington finally agreed on a
comprehensive tax reform bill – a long-absent fiscal achievement – providing for a substantial cut
in corporate taxes as well as lower personal rates. In contrast with previous tax legislation, this new
law comes at a time when unemployment is relatively low at 4%, thereby providing stimulus to an
economy that is already showing momentum. To this point, the 3Q GDP print reported in December
came in at 3.2%, bringing the year-over-year growth rate to 2.3%, up from 1.8% at the end of 2016.
Despite this increase in economic activity, consumer price pressures remained muted, with the latest
core CPI and core PCE prints coming in at 1.7% and 1.5%, respectively, well below the Fed’s nominal
2% target. Above all, volatility remained dormant throughout the year with both the VIX and MOVE
Indices at all-time lows, notwithstanding many headline risks (i.e., political uncertainties, escalating
North Korea rhetoric, and Fed composition changes)...
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