2017 ended with a favorable environment forpension 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 fundingratio model by 1% from December 2016’s 86% figure to 87%. It was a strong year inthe capital markets especially in equities with a 21.
83% and 25.63% rally inthe S&P 500 and MSCI EAFE International. The Barclays Aggregate indexlagged the PPA liability return by returning 3.54%. There has been a strong rebound in corporateearnings growth as the market, with muted volatility, shrugged off uncertaintyin the political landscape, threats of terrorism and conflicts, and adevastating hurricane season. The S&P 500 had its first “perfect” year everof positive total returns every month.
From peak to trough, the worst drawdownfor the S&P 500 was -3% for the entire year. Additionally, the tax reform passedby the Trump administration which cut the corporate tax rate to 21% was metwith optimism in the markets. Over the year, tech stocks returned close to 40%with industrials, financials, consumer discretionary, and materials eachreturning about 20%. International equity markets outpaced US equities givenrising earnings and improving economic activity. FX had a major effect on theUS dollar-denominated returns as the dollar depreciated heavily in the year. In fixed income, a major theme was thesignificant flattening of the US Treasury curve heavily due to a rise in shortrates.
The difference between the 10 Year and 2 Year Treasuries narrowed by71.5 bps for the year with the 10 Year ending at 2.41% (falling by 2.3 bps) andthe 2 Year ending at 1.89% (increasing by 69.
2 bps). Regarding credit spreads, theBarclays Credit index’s OAS tightened to 89 bps year end from 117 bps in December2016. The Fed raised rates three times in theyear referencing to accelerating GDP figures and falling unemployment rates. Asof year-end, Federal Reserve’s balance sheet contained $2.
5 trillion inTreasuries and $1.8 trillion in MBS. Per FOMC normalization guidelines from theSeptember 2017 meeting minutes, it is forecasted that the ending balance willbe $1.6 trillion in Treasuries and $1.1 trillion in MBS in December 2021. Pensions should monitor several themesin the new year:· Theeffect of the new tax reform package on corporate earnings· Thenew Fed President Jerome Powell seating in February· Geopoliticalenvironment associated with the Middle East and North Korea· Risingtrade protectionism revolving around NAFTA, US and China relations, and anyother trade agreements affecting global expansion· Theimpact of the mid-term US elections in November