2017 was an exceptional year for globally diversified investors.
The US Shiller CAPE 10 year PE ratio is reaching historic levels indicating that the US stock market may be overvalued.
Vanguard’s US fair-value CAPE measurement that adjusts for inflation and interest rates indicates a less overvalued US market.
International Developed and Emerging Market Shiller CAPE 10 year PE ratios are less elevated which may indicate higher future long term returns for these markets versus US markets.
Valuation measurements such as the Shiller CAPE 10 PE ratio tell us nothing about when to expect the next market correction or bear market.
Rational investors should expect lower returns in the foreseeable future.
After significant gains in 2017, investors should consider rebalancing their portfolios especially if they are concerned about elevated stock market valuations.
- Looking at broad market indices, emerging markets outperformed US and non-US developed markets during the quarter.
- Small caps outperformed large caps in non-US developed markets and emerging markets but underperformed in the US.
- The Bloomberg Commodity Index Total Return gained 4.71% in the fourth quarter, bringing the 2017 total annual return to 1.70%.
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- Emerging markets outperformed developed markets, including the US, during the quarter.
- In US dollar terms, developed markets outperformed US equity indices but underperformed emerging markets indices during the quarter.
- The Bloomberg Commodity Index Total Return gained 2.52% during the third quarter.
- Interest rates increased slightly across the US fixed income market for the quarter, but total returns still remained positive for most investment grade indices.