In the US the S&P 500 ended 2017 up 21.8%, an advance that added roughly $3.9 trillion to the index’s market value. Interestingly, about a quarter of that market value creation came from the five largest US companies by market value: Apple, Alphabet, Amazon.com, Facebook and Microsoft. We/you own three of those five in the large cap portfolio. The US market continues to be propelled by an accelerating economy, healthy corporate earnings, and improving global growth. Third quarter GDP expanded at a 3.3% annual rate, the best in three years. Corporate earnings growth posted its largest increase since 2011 as measured by earnings per share. The recent tax overhaul could further boost earnings growth and stock prices.
Meanwhile the Europe Australasia and Far East index (EAFE), which reflects most of the developed world ex-US, climbed 25% in dollar terms in 2017, adding $3.9 trillion to its market value as economies once dormant revived to propel stocks. The economies of all 45 countries tracked by the Organization for Economic Cooperation and Development expanded in 2017, an uncommon event. The Eurozone economy expanded at the fastest pace in a decade. In Japan, companies’ earnings are improving and investors are increasingly encouraged that policies to promote growth are working.
We’ve advised clients throughout 2017 to consider the benefits of diversifying into non-US equities where valuations remain attractive. In fact investors added $221 billion into international equity funds in 2017, which by early December was already the largest one-year increase since at least 2000 according to Investment Company Institute. International equities are generally less expensive than their U.S. counterparts. The price of S&P 500 stocks compared with earnings over the past year was 22.8X according to Fact Set. The price earnings ratio for the Europe 600 was 19.1X while the Nikkei Stock Average was 18.3X. In addition to valuation, we continue to encourage clients to consider the diversification benefits associated with owning international stocks.