Markets helped by what didn’t happen in 2017

Many of the assessments of the 2017 financial markets understandably focused on the impressively favourable outcomes delivered by stocks and other risk assets. Yet it is also worth considering what didn’t happen — in particular, nine events, which, by not taking place, contributed to make the last 12 months exceptional for many investors, big and small.
Superlatives have been and should be used to describe stock-market performance in 2017. Rewarding overall returns, including gains of 25% for the Dow Jones Industrial Average and 19% for the S&P 500, came wrapped in extremely low volatility. The VIX, the most widely followed measure of market volatility, registered nine of its 10 lowest levels last year.
The series of record highs during the year — 71 for the Dow alone — was accompanied by very few episodes of market retracement. And the rare times these occurred, they were comfortably limited in size, duration and scope.
Overall, the Dow rose nine months in a row, the longest streak since 1959; the S&P delivered positive returns every month of the year. Adding to the good news for investors, the cost of risk mitigation associated with the traditional 60/40 stock/bond investment portfolio was de minimus, and even non-existent with a diversified fixed-income approach. In another unusual twist, both stocks, bonds delivered positive returns.
The yield on the 10-year US government bonds ended the year at 2.41%, or four basis points lower than at the start of the year. Moreover, the US government bond market traded in a relatively
narrow range all year.
Yet as long and consequential as the list of 2017 superlatives is, it is also worth looking at what didn’t happen — especially if the goal is to look ahead to 2018. In this regard, nine issues are worth mentioning.

Lack of a Fed policy mistake
Confounding critics again, the Federal Reserve took important steps in normalizing monetary policy without disrupting markets and/or derailing economic growth. These actions included several interest-rate hikes and laying out a timetable for reducing the balance sheet.

No durable disruptions
Belying the fears of some, the Trump administration did not disengage from the North American Free Trade Agreement, declare China a currency manipulator, or cancel free-trade pacts with countries such as South Korea. It did exit the TPP negotiations, but this agreement was still a work in progress and had not had any
notable impact on trade.

No spike in inflation
Despite the sharp decline in the unemployment rate and a year of impressive net job creation, neither wage growth nor the inflation rate took a meaningful leg up.

No selloff in US govt bonds
The lack of inflationary pressure was one of the factors helping to explain a government bond market that defied expectations again. The persistence of low and stable yields reinforced the general market risk-taking appetite, underpinned by the notion that, with the Bank of Japan and the ECB remaining ultra-dovish, the central banking community would remain investors’ BFF.

No dollar appreciation
After the notable appreciation into the start of 2017 and the resulting cautionary statements by President Donald Trump about excessive currency strength, the dollar remained relatively weak for most of the year even though the Fed raised rates

No bitcoin regulatory crackdown
Despite some worrying that the historic surge in bitcoin prices was a bubble that would end up bursting and hurt most small investors, there was very little regulatory backlash against a phenomenon that some also believe is empowering illegal activities.

No contagion from Puerto Rico or Venezuela
Although both Puerto Rico and Venezuela missed contractual payments on their bonds, neither event created contagion in the municipal and emerging-market segments, let alone more broadly.

No geopolitical shock for markets
North Korea continued its brazen threats of nuclear attack throughout most of 2017, including on New Year’s Eve. Yet markets continued to ignore the risk almost all year, betting that provocative words would remain just that and not translate into actions that would disrupt markets during the year.

No OPEC disintegration
Despite the pressure earlier in the year of low oil prices, the operational discipline of the OPEC cartel was not eroded. If anything, it strengthened during the year. That, together with effective cooperation with Russia and other non-OPEC producers, allowed oil prices to withstand competitive pressures from shale and end the year at levels not seen since December 2014. This gave an important boost to energy stocks, reversing their large underperformance
during the first half of 2017.
The failure of these nine threats to materialize contributed to 2017’s strong annual performance for risk assets. Together, they turbocharged a rally powered by improving economic prospects, strong corporate profitability and ample liquidity. After closing the books on a great year, investors now need to assess the durability of this unusual combination of things that did and did not happen.

—Bloomberg