The volatility in weather conditions stands in stark contrast to the level of volatility in financial markets. During 2017, the yield on the 10-year maturity U.S. Treasury note rarely ventured out of a 25 basis point band, and ended the year only 8 basis points higher than where it began. Even more notable was the lack of volatility in domestic equity markets, where the VIX inched lower as stock prices surged. Much debate ensued over the cause of this lack of volatility; however, it was welcomed by investors of all stripes. The S&P 500 returned nearly 20%, while the Bloomberg Barclay’s Aggregate Bond Index returned a respectable 3.5%, despite a terribly low interest rate environment.
Many themes contributed to the outcomes in 2017: resurgence in global growth, unexpectedly strong corporate earnings, easy monetary and financial conditions, job growth, consumers willingness to spend, low energy prices, and a benign inflation environment. Exporters received help from a weaker dollar. Domestically, growth expectations were given a big assist by a sizeable tax cut, which came to pass shortly before year-end. Both corporations and individuals will be shelling out far fewer dollars to Uncle Sam in 2018.