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  Fourth Quarter 2017 Market Commentary

Economic Highlights

 

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GDP: Real GDP grew at a 3.2% annualized rate during the third quarter of 2017, with all of the major components of GDP contributing to growth. Personal consumption slowed, but still added 1.5% to real growth. Business investments are growing at a pace not seen since 2014, contributing more than 2% to real GDP during the first three quarters of 2017. A shrinking trade deficit contributed to growth, as did the first increase in government spending this year. Source: Department of Commerce (BEA)

Interest Rates: The Treasury yield curve continued to flatten during the fourth quarter, with short to intermediate yields rising and longer-term rates falling. The 10-year Treasury was up just seven basis points, finishing the year at 2.40%. The Federal Reserve raised its benchmark rate by 0.25% and meaningfully increased their forecast for real GDP growth next year. Source: U.S. Treasury

Inflation: Consumer price increases accelerated during the second half of 2017. The Consumer Price Index was up 1.0% for the three months ending November 2017 and 2.2% for the one-year period. The 10-year breakeven inflation rate closed the fourth quarter at 1.96%, up from 1.84% at the end of September. Source: Department of Labor (BLS), U.S. Treasury

Employment: Jobs growth was solid in 2017, with total nonfarm employment increasing by an average of 170,000 jobs per month during the three months ending November 2017. The unemployment rate was 4.1% in November, a level not seen since the 2000s. Source: Department of Labor (BLS)

Housing: Home prices continued to move higher during 2017, with the S&P Case-Shiller 20-city Home Price Index up 0.7% for the three months ending October 2017. For the past 12 months, the Index is up 6.4%. Source: Standard & Poor’s

The U.S. Equity Market

The U.S. stock market, represented by the Wilshire 5000 Total Market IndexSM, was up 6.39% for the fourth quarter of 2017. This marks the ninth consecutive year of positive gains for the broad U.S. equity market. Several factors contributed to this success, including a rebound in global economic growth and continued strength domestically. Investors also responded positively to the largest overhaul of the U.S. tax system in 30 years. What also made the past year particularly impressive was the relative lack of volatility. The largest drawdown for the year was -2.75%, and there were only four trading days where the market was down 1% or more, making 2017 one of the least volatile years in nearly four decades.

U.S. Equity

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Wilshire 5000 Total Market IndexSM 1.08 6.39 20.99 20.99
Standard & Poor’s 500 Index 1.11 6.64 21.83 21.83
Standard & Poor’s TSX Index (CAD) 4.05 4.26 16.77 16.77
Wilshire 4500 Completion IndexSM 0.46 4.78 17.84 17.84

U.S. Equity by Size/Style

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Wilshire U.S. Large Cap IndexSM 1.20 6.70 21.84 21.84
Wilshire U.S. Large Cap Growth IndexSM 0.81 7.33 27.71 27.71
Wilshire U.S. Large Cap Value IndexSM 1.58 6.09 16.31 16.31
Wilshire U.S. Small Cap IndexSM -0.08 3.56 13.45 13.45
Wilshire U.S. Small Cap Growth IndexSM 0.03 4.15 19.55 19.55
Wilshire U.S. Small Cap Value IndexSM -0.18 2.97 7.42 7.42
Wilshire U.S. Micro Cap IndexSM 0.76 2.34 15.66 15.66

Large capitalization stocks outperformed their small cap counterparts, with the Wilshire Large Cap IndexSM up 6.70% versus a gain of 3.56% for the Wilshire Small Cap IndexSM. The large cap segment of the market far outpaced small caps for the full year as well. The Wilshire U.S. Micro Cap IndexSM was up 2.34% for the quarter and 15.66% for the one-year. Growth stocks led value stocks during the fourth quarter and the one-year in both the large and small cap spaces.

Each of the eleven major sectors produced gains during the quarter. The best performing sectors were Consumer Discretionary (+9.1%), Information Technology (+8.6%) and Financials (+8.0%). Utilities were the laggard but still delivered positive performance (+0.7%).

Quarterly Change in Real Private Investment

Quarterly Change in Real Private Investment

Source: Federal Reserve

The third quarter of 2017 was the second consecutive quarter of real GDP growth in excess of 3%, annualized, since mid-2014. Personal consumption, the largest component of GDP, has been relatively steady since recovering from the 2008 recession, while private fixed investment (non-residential) has been on the rise more recently. Businesses seem to be gaining confidence in the global economy and have been increasing spending on equipment while growing inventories during the quarter, contributing more than three-quarters of a percent to real GDP growth. Strong retail sales during the fourth quarter have helped raise expectations for economic growth during the final quarter of 2017.

The Non-U.S. Equity Market

Developed and emerging non-U.S. equity markets produced strong returns during the fourth quarter of 2017. The U.S. dollar continued to weaken, providing an additional boost for U.S. investors holding foreign currencies. Japan was one of the strongest developed markets during the quarter due to simulative policies by both the Bank of Japan and the national government. Japan is now experiencing its strongest economy in more than a decade. Emerging markets led all global equities during 2017 and produced their second consecutive positive annual gain. In fact, their nearly 40% return was the strongest year for broad emerging markets equity since they recovered from the global financial crisis in 2009.

Non-U.S. Equity

  USD (%) Local Currency (%)
  MTD QTD YTD 1 Year MTD QTD YTD 1 Year
MSCI AC World ex U.S. 2.24 5.00 27.19 27.19 1.52 4.21 18.23 18.23
MSCI EAFE 1.61 4.23 25.03 25.03 1.20 3.66 15.23 15.23
MSCI Europe 1.51 2.21 25.51 25.51 0.96 1.27 13.06 13.06
MSCI Pacific 1.69 7.99 24.64 24.64 1.54 8.08 19.69 19.69
MSCI Japan 0.70 8.49 23.99 23.99 1.37 8.57 19.75 19.75
MSCI EM (Emerging Markets) 3.59 7.44 37.28 37.28 2.56 5.68 30.55 30.55
MSCI ACWI ex U.S. Small Cap 3.07 6.56 31.65 31.65 2.40 5.78 22.43 22.43

The Fixed Income Market

Developed and emerging non-U.S. equity markets produced strong returns during the fourth quarter of 2017. The U.S. dollar continued to weaken, providing an additional boost for U.S. investors holding foreign currencies. Japan was one of the strongest developed markets during the quarter due to simulative policies by both the Bank of Japan and the national government. Japan is now experiencing its strongest economy in more than a decade. Emerging markets led all global equities during 2017 and produced their second consecutive positive annual gain. In fact, their nearly 40% return was the strongest year for broad emerging markets equity since they recovered from the global financial crisis in 2009.

U.S. Fixed Income

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Bloomberg Barclays U.S. Aggregate 0.46 0.39 3.54 3.54
Bloomberg Barclays Long Gov’t/Credit 1.89 2.84 10.71 10.71
Bloomberg Barclays Long Term Treasury 1.72 2.37 8.53 8.53
Bloomberg Barclays U.S. TIPS 0.92 1.26 3.01 3.01
Bloomberg Barclays U.S. Credit 0.80 1.05 6.18 6.18
Bloomberg Barclays U.S. Corporate High Yield 0.30 0.47 7.50 7.50

Non-U.S. Fixed Income

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Bloomberg Barclays Global Aggregate 0.35 1.08 7.39 7.39
Bloomberg Barclays Global Aggregate (Hedged) 0.22 0.80 3.04 3.04
Bloomberg Barclays EM Local Currency Government Universal 1.41 1.95 10.68 10.68
Bloomberg Barclays EM Local Currency Gov’t Universal (Hedged) 0.22 -0.51 0.60 0.60
Citigroup World Government Bond Index ex-U.S. 0.08 1.57 10.33 10.33
Citigroup World Government Bond Index ex-U.S. (Hedged) -0.10 1.10 2.06 2.06

Real Estate/Commodity

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Wilshire U.S. RESISM -0.16 1.72 4.84 4.84
Wilshire Global ex U.S. RESISM 3.29 6.02 20.65 20.65
Wilshire Global RESISM 1.04 3.21 10.01 10.01
Dow Jones UBS Commodity Index 2.99 4.71 1.70 1.70
S&P GSCI Commodity 4.41 9.90 5.77 5.77
Alerian MLP Index 4.74 -0.95 -6.52 -6.52

The Real Estate and Commodity Markets

Real estate securities were up in the U.S. during the fourth quarter, with an even stronger return globally due in part to a weakening dollar. Commodities were up for the quarter as crude oil rose 16.9% to $60.42 per barrel. Oil prices finished the year up, increasing 12.5% broadly. Natural gas prices were down for the quarter, posting a loss of -1.8% and ending the quarter at $2.95 per million BTUs. MLP returns were negative for the quarter and for the past 12 months. Finally, gold prices were up and finished at approximately $1,309 per troy ounce, up 1.9% from last quarter.

The Liquid Alternatives Market

The Wilshire Liquid Alternative IndexSM returned 1.51% in the fourth quarter, inline with the 1.50% return of the HFRX Global Hedge Fund Index. Systematic and discretionary global macro strategies contributed positively to performance while currency strategies detracted. The majority, if not all of the performance of CTAs, came from the equity space as interest rates, currencies and commodities were more range bound and lacking in trends. Credit managers had a strong quarter as corporate credits were positioned to benefit from proposed lower corporate tax rates and a constructive economic environment. Merger arbitrage strategies were up modestly, following negative November performance due to several large merger deals facing challenges.

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Wilshire Liquid Alternative 0.40 1.51 5.08 5.08
Wilshire Liquid Alternative Equity Hedge 0.57 2.41 7.57 7.57
Wilshire Liquid Alternative Event Driven 0.44 0.31 2.79 2.79
Wilshire Liquid Alternative Global Macro 0.50 3.19 4.30 4.30
Wilshire Liquid Alternative Multi-Strategy 0.43 1.86 7.14 7.14
Wilshire Liquid Alternative Relative Value 0.24 0.26 3.43 3.43

Disclosures

Wilshire Funds Management (“WFM”) and Wilshire Consulting are business units of Wilshire Associates Incorporated (“Wilshire®”). WFM delivers Wilshire Advisor Solutions, which include models designed to provide a broad range of outcomeoriented investment solutions for advisors to use with their clients. Wilshire is a registered service mark of Wilshire Associates Incorporated, Santa Monica, California. All other trade names, trademarks, and/or service marks are the property of their respective holders.

This material contains confidential and proprietary information of Wilshire. It may not be disclosed, reproduced, or redistributed in whole or in part, to any other person or entity without prior written permission from Wilshire Funds Management.

This material is intended for informational purposes only and should not be construed as legal, accounting, tax, investment, or other professional advice. Past performance does not guarantee future returns. This material may include estimates, projections and other “forward-looking statements.” Due to numerous factors, actual events may differ substantially from those presented.

This material represents the current opinion of Wilshire based on sources believed to be reliable. Wilshire assumes no duty to update any such opinions. Wilshire gives no representations or warranties as to the accuracy of such information, and accepts no responsibility or liability (including for indirect, consequential or incidental damages) for any error, omission or inaccuracy in such information and for results obtained from its use. Information and opinions are as of the date indicated, and are subject to change without notice.

©2018 Wilshire Associates Incorporated. All rights reserved.

180119 WAS E0318

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