2017 the US Treasury curve heavily due

2017 ended with a favorable environment for
pension plans, as the Ryan Labs Asset Allocation Model returned

+13.09% versus the RL PPA liabilities’
return of +11.85%. This outperformance of +1.24% increased the RL PPA funding
ratio model by 1% from December 2016’s 86% figure to 87%. It was a strong year in
the capital markets especially in equities with a 21.83% and 25.63% rally in
the S&P 500 and MSCI EAFE International. The Barclays Aggregate index
lagged the PPA liability return by returning 3.54%.


There has been a strong rebound in corporate
earnings growth as the market, with muted volatility, shrugged off uncertainty
in the political landscape, threats of terrorism and conflicts, and a
devastating hurricane season. The S&P 500 had its first “perfect” year ever
of positive total returns every month. From peak to trough, the worst drawdown
for the S&P 500 was -3% for the entire year. Additionally, the tax reform passed
by the Trump administration which cut the corporate tax rate to 21% was met
with optimism in the markets. Over the year, tech stocks returned close to 40%
with industrials, financials, consumer discretionary, and materials each
returning about 20%. International equity markets outpaced US equities given
rising earnings and improving economic activity. FX had a major effect on the
US dollar-denominated returns as the dollar depreciated heavily in the year.


In fixed income, a major theme was the
significant flattening of the US Treasury curve heavily due to a rise in short
rates. The difference between the 10 Year and 2 Year Treasuries narrowed by
71.5 bps for the year with the 10 Year ending at 2.41% (falling by 2.3 bps) and
the 2 Year ending at 1.89% (increasing by 69.2 bps). Regarding credit spreads, the
Barclays Credit index’s OAS tightened to 89 bps year end from 117 bps in December


The Fed raised rates three times in the
year referencing to accelerating GDP figures and falling unemployment rates. As
of year-end, Federal Reserve’s balance sheet contained $2.5 trillion in
Treasuries and $1.8 trillion in MBS. Per FOMC normalization guidelines from the
September 2017 meeting minutes, it is forecasted that the ending balance will
be $1.6 trillion in Treasuries and $1.1 trillion in MBS in December 2021.


Pensions should monitor several themes
in the new year:

effect of the new tax reform package on corporate earnings

new Fed President Jerome Powell seating in February

environment associated with the Middle East and North Korea

trade protectionism revolving around NAFTA, US and China relations, and any
other trade agreements affecting global expansion

impact of the mid-term US elections in November