Equity markets continued their rally and reached new highs during the fourth quarter. U.S. equities posted a positive 6.3 percent return for the fourth quarter (Russell 3000). Equity returns were fueled by accelerating global growth, continued low interest rates and inflation, and the tax reform bill that passed late in the quarter. After outperforming domestic equities for most of 2017, international equities advanced at a slower pace over the quarter with a 4.3 percent gain (MSCI EAFE). Interest rates moved modestly higher creating a slight headwind for bonds. The 10-year Treasury yield increased 7 basis points over the quarter and ended the year at 2.4 percent. The broad U.S. fixed income market posted a 0.4 percent gain for the quarter (Barclays Aggregate).
The U.S. economic expansion continued with unemployment hitting another cycle low of 4.1 percent. Third quarter GDP growth accelerated to 3.3 percent, which is the fastest pace in three years. Strong economic activity and tightening labor markets led the Federal Reserve to raise the fed funds rate again in December. The Fed also signaled the likelihood of three more rate hikes in 2018, as long as the economy remains on solid footing and inflation increases to normalized levels.
One of the most significant developments of the fourth quarter was the sweeping tax reform bill. Tax cuts are expected to put more money in the hands of consumers and corporations. As the Chart of the Quarter shows, the U.S. corporate tax rate was one of the highest in the world prior to the tax reform. Reducing the corporate tax rate from 35 to 21 percent levels the playing field for U.S. corporations when competing in the global economy. Besides the obvious benefit of higher earnings for U.S corporations, the tax cuts could serve as further fuel to the economy if corporations use a portion of this additional income for capital spending and increased wages for employees.