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stocks on computerThe fourth quarter capped yet another stellar year for U.S. stocks. Larger-cap U.S. stocks gained 6.6 percent for the quarter and ended the year with a 21.7 percent total return. This was the ninth consecutive year of positive returns for the index—tying the historic 1990s bull market and capping a truly remarkable run from the depths of the 2008 financial crisis.

The broad driver of the market’s rise for the year was rebounding corporate earnings growth, which was supported by solid economic data, synchronized global growth, still-quiescent inflation, and accommodative monetary policy. U.S. stocks got an additional catalyst in the fourth quarter with the passage of the Republican tax plan, presumably reflecting investors’ optimism about its potential to further boost corporate after-tax profits, at least over the shorter term.

By year-end, the S&P 500 Index had rallied for more than 400 days without registering as little as a 3 percent decline. This is the longest such streak in 90 years of market history, according to Ned Davis Research.

Foreign stock returns were even stronger, with developed international markets gaining 26.4 percent and emerging markets up 31.5 percent for the year. In the fourth quarter, however, these markets couldn’t match the S&P 500, gaining 4 percent–6 percent. Our portfolios benefited from meaningful exposure to emerging-market and European stocks.

Moving on to bonds, the core bond index fund gained 3.5 percent in 2017. This return was close to the index’s yield at the start of the year, as intermediate-term interest rates changed little during the year. Although the Federal Reserve raised short-term rates three times, yields at the long end of the Treasury curve declined and the yield curve flattened.

Corporate bonds across all credit qualities and maturities had positive returns. High-yield bonds gained 7.5 percent. Investment-grade municipal bonds rebounded from a flat 2016, returning 4.5 percent. Our long-held tactical positions in several flexible and absolute-return-oriented bond funds added value, outperforming core bonds by several percentage points.

Our investments in liquid alternative strategies fulfilled their portfolio diversification roles while generating low- to mid-single-digit returns.  These funds beat core bonds but, not surprisingly, trailed the 20 percent-plus stock market returns.

The year 2017 was a very good one for most financial markets. While the macro outlook remains positive, unprecedented central bank policy shifts could trigger increased volatility, a stock market correction, or even a recession sometime in this business cycle. During this uncertain time, it is all the more important to stay disciplined and patient. We remain confident in our diversified portfolio positioning looking ahead over our long-term investment horizon.

If you haven’t read it already, we encourage you to take a few additional moments and read our 2017 year-end investment commentary and outlook to 2018.