Quarterly Market Review - Amazon S3€¦ · Quarterly Market Review Fourth Quarter 2017 This report...
Transcript of Quarterly Market Review - Amazon S3€¦ · Quarterly Market Review Fourth Quarter 2017 This report...
Quarterly Market Review Fourth Quarter 2017
MEET THE NEW YEAR, SAME AS THE OLD YEAR?
Dear Clients,
When thinking about what to expect in 2018, I couldn't help but think of a line from The Who's 1971 hit, "Won't Get Fooled Again." The line goes " ... meet the new boss, same as the old boss ... " So I took some liberty with the lyrics for the title of this commentary.
For that is the big question. Will equity markets continue an incredible bull run that first began way back in March 2009, but seemed to gather steam last year.
I believe it is fair to say that the magnitude of capital markets returns in 2017 came as a surprise to most observers.
Who would have believed that the volatility of both stock and bond markets would be so quiescent in the wake of the inauguration of celebrity politician Donald J. Trump as our 45th President?
Predictions of market turmoil due to any number of concerns, such as intense political infighting in Washington D.C., numerous geopolitical risks, shifting central bank policies, the threat of rising inflation, and stretched stock/bond valuations, to name just a few, simply did not come to pass.
In fact, U.S. stocks (S&P soo Index) posted twelve consecutive months of gains (including dividends) in 2017. Adding in the two positive months of November and December 2016, this period represents the longest monthly winning streak in history.
Looking at the performance of the S&P soo on an annual basis, investors have enjoyed nine consecutive years of positive total returns. Since 2003, there has only been one year of negative returns-that awful37% drop in 2008.
What explains the heady stock returns of 2017? Before simply dismissing this market as a 'bubble," consider that the U.S. economy has experienced an impressive run of stable interest rates, low inflation, and rising corporate profits. Other recent catalysts include a more favorable environment for business investment driven by regulatory rollbacks and the promise of corporate tax reform.
The benefit derived from less aggressive administrative bureaucrats is probably underappreciated. Freeing up labor and capital resources to more productive uses than mere paper shuffling redounds to our economic wellbeing.
The changes to the corporate tax rate are certainly welcome and should, all things equal, encourage greater levels of business investment. For it is only through productive investment can we expect further job creation and higher wages.
Fixed-income markets provided solid, if unspectacular, returns last year. Despite three policy rate increases (federal funds rate) by the Federal Reserve, bonds (as measured by the Bloomberg Barclays Aggregate Index) managed to generate a total return of 3.54%. Perhaps even more impressive is the 8.53% return of the Bloomberg Barclays Long U.S. Government Bond Index during 2017. Not bad when you consider many observers assumed Fed rate hiking would be a major headwind for long-duration fixed-income assets.
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International markets also delivered impressive performance, aided by a weaker U.S. dollar as well as improving fundamentals in many regions. The MSCI EAFE Index, which measures returns of developed countries, generated a return of 25% while the MSCI Emerging Markets Index returned an impressive 37.3%.
Quite reasonably, investors continue to ask how long this ride can go on. Surely stocks must be due for a comeuppance in 2018?
Perhaps this will be the year. If only such things could be predicted . But U.S. stocks have started the new year right where they left off the old .
I believe that as long as the economy continues on its present trajectory, it is reasonable to expect another decent year for stocks.
The Fed will have new leadership as Chairwoman Janet Yellen steps down in early February. We do not expect much in the way of changes in policy, either in terms of philosophy or trajectory, from incoming Chairman Jerome Powell.
I do suggest investors prepare for more humble returns in both equity and fixed -income markets over say, the next 5-10 years, than what investors have garnered since the market troughed in early 2009.
Looking at U.S. stocks, considering current market valuations coupled with more modest corporate profit growth and interest rate headwinds, low- to mid-single digit returns seem more reasonable to expect in the coming years.
With market interest rates at current levels, the math simply isn't there for bonds to have the level of returns enjoyed since interest rates peaked in the early 1980s. Relatively tight credit spreads also represents a headwind for corporate debt markets.
In addition to having realistic investment return expectations, be prepared for the possibility of volatility returning to markets. History suggests stocks will experience pullback(s), perhaps quite severe, this year. Proper diversification of your portfolio remains timeless advice. This includes an allocation to non-U.S. markets and perhaps alternatives. Bonds, despite meager rates, should continue to serve as ballast in any well diversified investment portfolio. For the high tax bracket investor, municipal bonds continue to offer relatively attractive opportunities.
After such a long stretch of low volatility and double-digit annual returns, investors tend to overestimate the ir true willingness and ability to endure gut-wrenching declines. If this possibly describes you, please take the opportunity now to schedule some time with your United Capital wealth advisor for a consultation.
Wishing you a healthy and prosperous 2018!
Respectfully,
Bob Landry, CFA, CFP Chief Investment Strategist
620 Newport Center Drive, Suite soo, Newport Beach, CA • 949·999.8500 • www.unitedcp.com
©2018 United Capital Financial Advisers, LLC. All Right s Reserved.
Quarterly Market Review Fourth Quarter 2017
This report features world capital market performance and a timeline of events for the last quarter. It begins with a global overview, then features the returns of stock and bond asset classes in the US and international markets.
The report also illustrates the impact of globally diversified portfolios and features a quarterly topic.
Overview:
Market Summary
World Stock Market Performance
World Asset Classes
US Stocks
International Developed Stocks
Emerging Markets Stocks
Select Country Performance
Select Currency Performance vs. US Dollar
Real Estate Investment Trusts (REITs)
Commodities
Fixed I nco me
Impact of Diversification
2017 Annual Market Review
•
•
Market Summary Index Returns
Since Jan. 2001
Avg. Quarterly Return
Best Quarter
Worst Quarter
International US Stock Developed Market Stocks
6.34% 4.23%
2.0% 1.6%
16.8% 25.9% Q2 2009 Q2 2009
-22.8% -21.2% Q42008 Q42008
Emerging Markets Stocks
7.44%
3.2%
34.7% Q2 2009
-27.6% Q42008
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Global Real Estate
2.97%
2.7%
32.3% Q3 2009
-36.1% Q42008
I
US Bond Market
Global Bond Market ex US
BONDS
0.39% 1.10%
1.2% 1.1%
4.6% 5.5% Q3 2001 Q4 2008
-3.0% -3.2% Q42016 Q2 2015
Past perfonnance is not a guarantee of future results. Indices are not available for direct investment. Index perfonnance does not reflect the expenses associated with the management of an actual portfolio. Market segment {index representation) as follows: US Stock Market (Russell3000 Index), International Developed Stocks {MSCI World ex USA Index [net div.]), Emerging Markets {MSCI Emerging Markets Index [net div.]), Global Real Estate {S&P Global REIT Index [net div.]), US Bond Market {Bloomberg Bardays US Aggregate Bond Index) , and Global Bond ex US Market{Citi WGBI ex USA 1-30 Years [Hedged to USD]). The S&P data are provided by Standard & Poo(s Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data© MSCI 2018, all rights reserved. Bloomberg Barclays data provided by Bloomberg. Citi fixed income indices © 2018 by Citigroup. 2
World Stock Market Performance MSCI All Country World Index with selected headlines from Q4 2017
260 "US Producer Prices Rise Strongly, Point to Firming Inflation" "US Consumer Confidence
in October Hit Its Highest Level since 2004"
"Oil Hits Two-Year Highs as US Stockpiles Drop"
"US Dollar Ends With Biggest Annual
Decline Since 2007" 250
240
230
220
210
"US Factory Activi ty Hits 13-Year High"
"Eurozone Consumer Confidence at 16-Year High"
"IMF Raises Global
Economic Outlook for This Year and 2018"
"New-Home Sales Growth Surges to 25-Year High"
Oct Nov
"UK Inflation Rate Holds at Five-Year High"
"Japan's Economy Boosted by Surge in Capital Spending"
"Home Sales Remained
Sluggish in Octobers"
Potential Output for First Time in Decade"
"Trump Signs Sweeping Tax
Overhaul Into Law"
"Fed Hikes Rates as Economy Picks Up"
"US Hiring Figures Reveal Sweet Spot for Economy; Unemployment Rates Holds at 17-YearLowof4.1%"
"UK, EU Reach Deal on
Brexit Divorce Terms"
Dec
These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news.
Graph Source: MSCI ACWIIndex [net div.]. MSCI data © MSCI2018, all rights reserved. It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results. 3
•
World Stock Market Performance MSCI All Country World Index with selected headlines from past 12 months
Short Term (Q1 2017-Q4 2017) "Trump Signs Sweeping
Tax Overhaul Into Law"
260 ·us Companies Post Profit Growth Not Seen in Six Years"
"New-Home Sales Growth Surges to 25-Year High" "UK, EU Reach
250
240
"Pound Drops to 31-Year Low
·us Consumer Confidence Reaches Highest Level since 2000"
"Global Stocks Post Strongest First Half in Years, Worrying Investors"
230 Against Dollar"
"Eurozone Confidence Hits Postcrisis High"
"US Trade Deficit Last Year Was
220 Widest since 2012"
210
200
190
"Fed Raises Interest Rates, Remains on Track to Keep Tightening"
Long Term 180 (2000-Q4 2017)
170
160
150 Dec-2016
250.00
200.00
150.00
100.00
50.00
0.00 2000 2004 2008
Mar-2017
"Unemployment Rate Falls to 16-Year Low, But Hiring Slows"
2012
Last 12 months
2016
Jun-2017
"Dollar Hits Lowest Level in More than 2% Years"
"US Factory Activity Hits 13-Year High"
"Household Debt Hits Record as Auto Loans and Credit Cards Climb"
"Oil Hits Two-Year Highs as US Stockpiles Drop"
·us Economy Reaches Its Potential Output for First Time in Decade"
Sep-2017 Dec-2017
These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news. Graph Source: MSCI ACWIIndex [net div.]. MSCI data© MSCI2018, all rights reserved. It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results. 4
World Asset Classes Fourth Quarter 2017 Index Returns(%)
Looking at broad market indices, emerging markets outperformed US and non-US developed markets during the quarter.
The value effect was negative in the US, non-US developed markets, and emerging markets. Small caps outperformed large caps in non-US developed markets and emerging markets but underperformed in the US.
MSCI Emerging Markets Small Cap Index (net div.)
MSCI Emerging Markets Index (net div. )
MSCI Emerging Markets Value Index (net div.)
S&P 500 Index
Russell 1000 Index
S&P Global ex US REIT Index (net div.)
Russell 3000 Index
MSCI World ex USA Small Cap Index (net div.)
Russell1000 Value Index
MSCI All Country World ex USA Index (net div.)
MSCI World ex USA Index (net div.)
MSCI World ex USA Value Index (net div.)
Russell 2000 Index
Russell 2000 Value Index
Dow Jones US Select REIT Index
Bloomberg Barclays US Aggregate Bond Index
One-Month US Treasury Bills
0.39
0.26
2.05
1.98
3.41
3.34
4.23
6.84
6.64
6.59
6.45
6.34
5.83
5.33
5.00
9.23
7.44
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor's Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data© MSCI2018, all rights reserved. Dow Jones data (formerly Dow Jones Wilshire) provided by Dow Jones Indices. Bloomberg Barclays data provided by Bloomberg. Treasury bills© Stocks, Bonds, Bills, and Inflation Yearbook"' , Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). 5
US Stocks Fourth Quarter 2017 Index Returns
The US equity market posted a positive return for the quarter, outperforming non-US developed markets but underperforming emerging markets.
Value underperformed growth in the US across large and small cap indices.
Overall, small caps in the US underperformed large caps.
World Market Capitalization-US
52°/o US Market $27.4 trillion
Ranked Returns for the Quarter (%)
Large Growth
Large Cap
Marketwide
Large Value
Small Growth
Small Cap 3.34
Small Value 2.05
Period Returns (%)
Asset Class 1 Year 3 Years*
Large Growth 30.21 13.79
Small Growth 22.17 10.28
Large Cap 21 .69 11 .23
Marl<etwide 21 .13 11 .12
Small Cap 14.65 9.96
Large Value 13.66 8.65
Small Value 7.84 9.55
* Annualized
7.86
6.59
6.34
5.33
4.59
5 Years* 10 Years*
17.33 10.00
15.21 9.19
15.71 8.59
15.58 8.60
14.12 8.71
14.04 7.10
13.01 8.17
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Cap Value (Russell 1 000 Value Index), Large Cap Growth (Russell1 000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA 1M I Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2018, all rights reserved. 6
International Developed Stocks Fourth Quarter 2017 Index Returns
In US dollar terms, developed markets underperformed the US and emerging markets during the quarter.
Looking at market indices , the value effect was negative.
Small caps outperformed large caps in non-US developed markets.
World Market Capitalization-International Developed
International Developed Market $19.4 trillion
Ranked Returns(%)
Small Cap
Growth
Large Cap
Value
Period Returns(%)
Asset Class 1 Year 3 Years*
Small Cap 31.04 12.96
Growth 27.61 8.38
Large Cap 24.21 7.36
Value 21 .04 6.26
* Annualized
Local currency
• US currency
5 Years * 10 Years*
11 .37 5.16
8.22 2.36
7.46 1.87
6.64 1.32
Past perfonnance is not a guarantee of future results. Indices are not available for direct investment. Index perfonnance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), and Growth (MSCI World ex USA Growth). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell3000 Index, MSCI World ex USA 1M I Index, and MSCI Emerging Markets 1M I Index. MSCI World ex USA 1M I Index is used as the proxy for the International Developed market. MSCI data © MSCI 2018, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. 7
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Emerging Markets Stocks Fourth Quarter 2017 Index Returns
In US dollar terms, emerging markets outperformed the US and non-US developed markets during the quarter.
Looking at broad market indices, the value effect was negative.
Small caps outperformed large caps in emerg ing markets.
World Market Capitalization -Emerging Markets
12o/o Emerging Markets $6.2 trillion
Ranked Returns (%)
Small Cap
Growth
Large Cap
Value
Period Returns (%)
Asset Class 1 Year
Growth 46.80
Large Cap 37.28
Small Cap 33.84
Value 28.07
* Annualized
Local currency
• US currency
9.23
3 Years* 5 Years* 10 Years*
11.88 6.85 2.35
9.10 4.35 1.68
8.44 5.41 2.78
6.21 1.75 0.91
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Marl<et segment (index representation) as follows: Large Cap (MSCI Emerging Marl<ets Index), Small Cap (MSCI Emerging Marl<ets Small Cap Index), Value (MSCI Emerging Marl<ets Value Index), and Growth (MSCI Emerging Marl<ets Growth Index). All index returns are net of withholding tax on dividends. World Marl<et Cap represented by Russell 3000 Index, MSCI World ex USA IMIIndex, and MSCI Emerging Markets 1M I Index. MSCI Emerging Marl<ets 1M I Index used as the proxy for the emerging marl<et portion of the market. MSCI data© MSCI 2018, all rights reserved. Frank Russell Company is the source and owner of the trademarl<s, service marl<s, and copyrights related to the Russell Indexes. 8
Select Country Performance Fourth Quarter 2017 Index Returns
In US dollar terms, Singapore and Japan recorded the highest country performance in developed markets, while Sweden and Italy posted the lowest returns for the quarter. In emerging markets, South Africa and India posted the highest country returns, while Pakistan and Mexico had the lowest performance.
Ranked Developed Markets Returns (%)
Singapore 9.28
Japan 8.53
Australia 7.43
Hong Kong 6.31
us 6.18
Austria 5.97
UK 5.85
Israel 4.45
Canada 4.14
New Zealand 3.91
Ireland 3.58
Germany 3.19
Switzerland
Denmark
Netherlands
France
Norway
Portugal
Belgium
Spain
Finland -1 .80
Italy -2.12
Sweden -2.90
Ranked Emerging Markets Returns(%)
South Africa
India
South Korea
Greece
Thailand
Malaysia
Chile
Czech Republic
Indonesia
China
Hungary
Peru
Philippines
Taiwan
Turkey
Poland
Russia
Qatar
Egypt
Colombia
Brazil
UAE
Mexico
Pakistan
-1 .91
-8.36
-9.32
13.41
12.86
10.69
8.93
8.29
7.75
7.65
7.03
6.99
5.34
5.06
4.77
2.68
0.78
20.91
Past perfonnance is not a guarantee of future results. Indices are not available for direct investment. Index perfonnance does not reflect the expenses associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI Wortd ex US 1M I Index (for developed markets), MSCI USA IMI Index (for US), and MSCI Emerging Markets 1M I Index. All returns in USD and net of withholding tax on dividends. MSCI data © MSCI 2018, all rights reserved. UAE and Qatar have been reclassified as emerging markets by MSCI, effective May 2014. 9
Select Currency Performance vs. US Dollar Fourth Quarter 2017
In developed markets, the Israeli shekel and the Singapore dollar both appreciated over 1.6%, while the Norwegian krone depreciated approximately 3% during the quarter. In emerging markets, the South African rand appreciated more than 9%, while the Mexican peso depreciated over 7%.
Ranked Developed Markets Returns(%)
Israel shekel (ILS} 1.76
Singapore dollar (SGD) 1.61
Euro (EUR) 1.57
Danish krone (DKK) 1.52
British pound (GBP) 0.83
Japanese yen (JPY) -0.08
Hong Kong dollar (HKD) -0.08
Canadian dollar (CAD) -0.18
Swedish krona (SEK) -0.31
Australian dollar (AUD) -0.32
Swiss franc (CHF)
New Zealand dollar (NZD) -1 .62
Norwegian krone (NOK) -2.68
Ranked Emerging Markets Returns(%)
South African rand (ZAR)
South Korean won (KRW)
Poland zloty (PLZ)
Malaysian ringgit (MYR)
Chilean peso (CLP)
Czech koruna (CZK)
Indian rupee (INR)
Thailand baht (THB)
Chinese yuan (CNY)
Taiwanese NT dollar (TWO)
Philippine peso (PHP)
Hungary forint (HUF)
Peru sol (PEl}
Russian ruble (RUB) -0.02
Indonesia rupiah (lOR) -0.73
Egyptian pound (EGP)
Colombian peso (COP)
Pakistani rupee (PKR) -4.55
Brazilian real (BRC) -4.64
Turkish lira (TRY) -6.21
Mexican peso (MXP) -7.19
2.33
2.01
1.90
1.76
1.72
0.80
9.07
6.99
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. MSCI data © MSCI2018, all rights reserved. 10
Real Estate Investment Trusts (REITs) Fourth Quarter 2017 Index Returns
Non-US real estate investment trusts outperformed US REITs.
Total Value of REIT Stocks
World ex US $485 billion 251 REITs (23 other countries)
58o/o us $672 billion 101 REITs
Ranked Returns(%)
Global REITs (ex US)
US REITs
Period Returns (%)
~set Class
Global REITs (ex US)
US REITs
* Annualized
1.98
1 Year 3 Years* 5 Years*
15.64 4.78 5.49
3.76 4.97 9.09
6.45
10 Years*
2.05
7.07
Past perfonnance is not a guarantee of future results. Indices are not available for direct investment. Index perfonnance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones US Select REIT Index data provided by Dow Jones ©. S&P Global ex US REIT Index data provided by Standard and Poor's Index Services Group © 2018. 11
Commodities Fourth Quarter 2017 Index Returns
The Bloomberg Commodity Index Total Return gained 4. 71% in the fourth quarter, bringing the 2017 total annual return to 1. 70%.
Petroleum led quarterly performance. Brent crude oil returned 18.87%, and WTI crude oil gained 15.64%. Grains was the worst-performing complex, with Chicago wheat and Kansas wheat declining by 8.46% and 7.19%, respectively.
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Ranked Returns for Individual Commodities(%)
Nickel
Brent oil
WTI crude oil
Cotton
Heating oil
Unleaded gas
Copper
Lean hogs
Sugar
Aluminum
Zinc
Silver
Gold
Live cattle
Soybean oil
Soybean meal
Soybeans
Coffee
Corn
-1 .54
-2.89
-4.01
0.62
0.28
20.95
18.87
15.64
14.53
13.57
13.34
10.96
7.52
7.52
7.27
5.64
Kansas wheat -7.19
Wheat -8.46
Natural gas -12.04
Period Returns(%)
Asset Class 1 Year 3 Years* 5 Years* 10 Years*
Commodities 1.70 -5.03 -8.45 -6.83
• Annualized
Past performance is not a guarantee of future results. Index is not available for direct investment Index performance does not reflect the expenses associated with the management of an actual portfolio. All index returns are net of withholding tax on dividends. SecuriUes and commodities data provided by Bloomberg. 12
Fixed Income Fourth Quarter 2017 Index Returns
Interest rate changes across the US fixed income market were mixed during the fourth quarter. The yield on the 5-year Treasury note rose 28 basis points (bps), ending at 2.20%. The yield on the 1 0-year Treasury note increased 7 bps to 2.40%. The 30-year Treasury bond yield decreased 12 bps to finish at 2.74%.
In terms of total returns, short-term corporate bonds declined 0.04% during the quarter but increased 1.85% for the year. Intermediate-term corporate bonds gained 0.17% for the quarter and 3.92% for the year.
The total returns for short-term municipal bonds were -0.65% for the quarter and 1.61% for the year. Intermediate-term municipal bonds fell 0.09% for the quarter but gained 4. 70% for the year. Revenue bonds outperformed general obligation bonds for the year.
Period Returns (%)
Asset Class
Bloomberg Barclays Long US Go-.emment Bond Index
Bloomberg Barclays US Corporate High Y ield Index
Bloomberg Barclays Municipal Bond Index
Bloomberg Barclays US Aggregate Bond Index
Bloomberg Barclays US TIPS Index
US Treasury Yield Curve(%)
4
3
2
12/30/2016
--~:Iii~====~~==:::;;:;:;;:;;;;;:_ 9/29/2017 _.. 12/29/2017
0 5 10
Yr Yr Yr
Bond Yields across Issuers (%)
10-Year US Treasury
Municipals
1 Year 3 Years*
8.53 2.85
7.50 6.35
5.45 2.98
3.54 2.24
3.01 2.05
AAA-AA Corporales
5 Years*
3.49
5.78
3.02
2.10
0.13
30 Yr
3.36
A-BBB Corporales
* Annual ized
10 Years*
6.49
8.03
4.46
4.01
3.53
Citi World Go-.emment Bond Index 1-5 Years (hedged to USD) 1.13 1.21 1.23 2.13
ICE BofAML 3-Month US Treasury Bill Index 0.86 0.41 0.27 0.39
ICE BofAML 1-Year US Treasury Note Index 0.57 0.49 0.38 0.90
Past perfonnance is not a guarantee of future results. Indices are not available for direct investment. Index perfonnance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the S&P National AMT -Free Municipal Bond Index. AAA-AA Corporales represent the Bank of America Merrill Lynch US Corporales, AA-AAA rated. A-BBB Corporales represent the Bank of America Merrill Lynch US Corporales, BBB-A rated. Bloomberg Barclays data provided by Bloomberg. US long-tenn bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook"', Ibbotson Associates, Ch icago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Citi fixed income indices © 2018 by Citigroup.ICE BofAML index data © 201 8 ICE Data Indices, LLC. The S&P data are provided by Standard & Poo~s Index Services Group. 13
Impact of Diversification Fourth Quarter 2017 Index Returns
These portfol ios illustrate the performance of different global stock/bond mixes and highlight the benefits of diversification. Mixes with larger allocations to stocks are considered riskier but have higher expected returns over time.
Ranked Returns(%)
100% Stocks
75/25
50/50
25/75
100% Treasury Bills
Period Returns (%)
Asset Class
100% Stocks
75/25
50/50
25/75
100% Treasury Bills
Growth of Wealth: The Relationship between Risk and Return
$100,000
$80,000
$60,000
$40,000
$20,000
$0
3.02
1.63
0.26
1 Year 3 Years*
24.62 9.89
18.23 7.54
12.14 5.15
6.33 2.75
0.80 0.34
5.84
4.42
* Annualized
10-Year
5 Years* 10 Years* STDEV1
11.40 5.22 16.80
8.59 4.26 12.59
5.79 3.11 8.38
3.00 1.78 4.18
0.21 0.30 0.16
Stock/Bond Mix
100% Stocks
75/25
50/50
01/1 988 01/1 991 01/1 994 01/1 997 01 /2000 01/2003 01/2006 01/2009 01/2012 01 /2015 12/2017
1. STDEV (standard deviation) is a measure of the variation or dispersion of a set of data points. Standard deviations are often used to quantify the historical return volatility of a security or portfolio.
Diversification does not eliminate the risk of market loss. Past perfonnance is not a guarantee of future results. Indices are not available for direct investmenllndex perfonnance does not reflect expenses associated with the management of an actual portfolio. Asset allocations and the hypothetical index portfolio returns are for illustrative purposes only and do not represent actual performance. Global Stocks represented by MSCI All Country World Index (gross div.) and Treasury Bills represented by US One-Month Treasury Bills. Globally diversified allocations rebalanced monthly, no withdrawals. Data © MSCI 2018, all rights reserved. Treasury bills© Stocks, Bonds, Bills, and Inflation Yearlbook"', Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). 14
Annual Market Review Appendix
2017 Annual Market Review
This report features world capital market performance for the last year.
Overview:
Market Summary
World Asset Classes
US Stocks
International Developed Stocks
Emerging Markets Stocks
Select Country Performance
Select Currency Performance vs. US Dollar
Real Estate Investment Trusts (REITs)
Commodities
Impact of Diversification
16
Market Summary Index Returns
International US Stock Developed Market Stocks
Emerging Markets Stocks
2017 STOCKS
21.13% 24.21% 37.28%
Since Jan. 2001
Avg. Annual 8.4% 7.0% 14.8%
Return
Best 33.6% 39.4% 78.5% Year 2013 2003 2009
Worst -37.3% -43.6% -53.3% Year 2008 2008 2008
Global Real Estate
7.41%
11.0%
37.4% 2006
-45.7% 2008
US Bond Market
3.54%
4.8%
10.3% 2002
-2.0% 2013
Global Bond Market ex US
2.06%
4.5%
9.8% 2014
1.4% 2013
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index [net div.]), US Bond Market (Bloomberg Barclays US Aggregate Bond Index), and Global Bond ex US Market (Citi WGBI ex USA 1-30 Years (Hedged to USD]). The S&P data are provided by Standard & Poo(s Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI2018, all rights reserved. Bloomberg Barclays data provided by Bloomberg. Citi fixed income indices © 2018 by Citigroup. 17
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World Asset Classes 2017 Index Returns(%)
Looking at broad market indices, emerging markets outperformed US and non-US developed markets in 2017.
The value effect was negative in the US, non-US developed markets, and emerging markets. Small caps outperformed large caps in non-US developed markets but underperformed in the US and emerging markets.
MSCI Emerging Markets Index (net div.)
MSCI Emerging Markets Small Cap Index (net div.)
MSCI World ex USA Small Cap Index (net div.)
MSCI Emerging Markets Value Index (net div.)
MSCI All Country World ex USA Index (net div. )
MSCI World ex USA Index (net div. )
S&P 500 Index
Russell 1000 Index
Russell 3000 Index
MSCI World ex USA Value Index (net div.)
S&P Global ex US REIT Index (net div.)
Russell 2000 Index
Russell 1000 Value Index
Russell 2000 Value Index
Dow Jones US Select REIT Index
Bloomberg Barclays US Aggregate Bond Index
One-Month US Treasury Bills 0.80
3.76
3.54
7.84
15.64
14.65
13.66
24.21
21 .83
21.69
21 .13
21 .04
28.07
27.19
33.84
31 .04
37.28
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & PoMs Index Services Group. Frank Russell Company is the source and owner of the trademarl<s. service marl<s, and copyrights related to the Russell Indexes. MSCI data © MSCI2018, all rights reserved. Dow Jones data (formerly Dow Jones Wilshire) provided by Dow Jones Indices. Bloomberg Bardays data provided by Bloomberg. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook'", Ibbotson Associates, Chicago (annually updated wor1< by Roger G.
18 Ibbotson and Rex A. Sinquefield).
US Stocks 2017 Index Returns
The US equity market posted positive returns for 2017 but underperformed nonUS developed and emerging markets.
Value underperformed growth in the US across large and small cap indices.
Small caps underperformed large caps in the US.
World Market Capitalization-US
52°/o US Market $27.4 trillion
Ranked Returns for 2017 (%)
Large Growth 30.21
Small Growth 22.17
Large Cap 21.69
Marketwide 21.13
Small Cap 14.65
Large Value 13.66
Small Value 7.84
Period Returns (%)
Asset Class 1 Year 3 Years* 5 Years* 10 Years*
Large Growth 30.21 13.79 17.33 10.00
Small Growth 22.17 10.28 15.21 9.19
Large Cap 21 .69 11 .23 15.71 8.59
Marketwide 21.13 11 .12 15.58 8.60
Small Cap 14.65 9.96 14.12 8.71
Large Value 13.66 8.65 14.04 7.10
Small Value 7.84 9.55 13.01 8.17
* Annualized
Past perfonnance is not a guarantee of future results. Indices are not available for direct investment. Index perfonnance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell1 000 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell1 000 Growth Index), Small Cap (Russell2000 Index), Small Cap Value (Russell2000 Value Index), and Small Cap Growth (Russell2000 Growth Index). Wor1d Market Cap represented by Russell 3000 Index, MSCI Wor1d ex USA 1M I Index, and MSCI Emerging Markets IMI Index. Russell3000 Index is used as the proxy for the US market. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data© MSCI 2018,
19 all rights reserved.
•
International Developed Stocks 2017 Index Returns
In US dollar terms, non-US developed markets outperformed the US market but underperformed emerging markets during 2017.
Looking at broad market indices, the value effect was negative.
Small caps outperformed large caps in non-US developed markets.
World Market Capitalization! nternational Developed
International Developed Market $19.4 trillion
Ranked Returns for 2017 (%)
Small Cap
Growth
Large Cap
Value
Period Returns (%)
Asset Class 1 Year 3 Years*
Small Cap 31.04 12.96
Growth 27.61 8.38
Large Cap 24.21 7.36
Value 21.04 6.26
* Annualized
Local currency
• US currency
5 Years* 10 Years*
11.37 5.16
8.22 2.36
7.46 1.87
6.64 1.32
Past perfonnance is not a guarantee of future results. Indices are not available for direct investment. Index perfonnance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), and Growth (MSCI World ex USA Growth). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell3000 Index, MSCI World ex USA 1M I Index, and MSCI Emerging Markets 1M I Index. MSCI World ex USA IMI Index is used as the proxy for the
20 International Developed market. MSCI data © MSCI 2018, all rights reserved.
Emerging Markets Stocks 2017 Index Returns
In US dollar terms, emerging markets outperformed the US and non-US developed markets for the year.
Across the large cap and mid cap space, the value effect was negative; however, in the small cap space, the effect was positive.
Overall, small caps underperformed large caps in emerging markets.
World Market Capital ization-Emerging Markets
12°/o Emerging Markets $6.2 trillion
Ranked Returns for 2017 (%)
Growth
Large Cap
Small Cap
Value
Period Returns (%)
Asset Class 1 Year 3 Years*
Growth 46.80 11.88
Large Cap 37.28 9.10
Small Cap 33.84 8.44
Value 28.07 6.21
* Annualized
Local currency
• US currency
46.80
5 Years* 10 Years*
6.85 2.35
4.35 1.68
5.41 2.78
1.75 0.91
Past perfonnance is not a guarantee of future results. Indices are not available for direct investment. Index perfonnance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), and Growth (MSCI Emerging Markets Growth Index). All index returns are net of withholding tax on dividends. World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMIIndex, and MSCI Emerging Markets IMIIndex. MSCI Emerging Markets 1M I Index used as the proxy for the emerging market portion of the market. MSCI data© MSCI 2018, all rights reserved.
•
21
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Select Country Performance 2017 Index Returns
In US dollar terms, Austria recorded the highest country performance in developed markets with a gain of more than 50%, while Israel posted the lowest return for the year. In emerging markets, Poland and China posted the highest country returns, each returning over 50%, while Pakistan and Qatar had the lowest performance.
Ranked Developed Markets Returns(%)
Austria
Denmark
Singapore
Hong Kong
Netherlands
Italy
Germany
France
Portugal
Spain
Japan
New Zealand
Switzerland
UK
Norway
Ireland
Finland
Austral ia
us Sweden
Belgium
Canada
Israel
~
--~ -
35.40
34.16
33.95
33.47
32.02
30.48
29.53
28.04
26.58
25.25
24.76
24.07
23.70
23.35
23.29
21 .97
20.94
20.59
20.51
19.87
15.62
10.36
51 .39
Ranked Emerging Markets Returns(%)
Poland
China
South Korea
India
Chile
Peru
Hungary
Turkey
Czech Republic
Greece
South Africa
Thailand
Taiwan
Malaysia
Brazil
Philippines
Indonesia
Mexico
Colombia
Egypt
Russia
UAE
Qatar -12.79 ,__
Pakistan -24.75 --
-----~ -~
~
53.56
50.67
6.04
3.72
4
4
43 .25
38. 95
38. 24
37.8 4
37.3 8
34.9 8
33.99
31.46
30.24
26.80
26.38
21 .53
19.08
15.01
14.96
13.65
5.13
2.25
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI World ex US 1M I Index (for developed marl<ets), MSCI USA 1M I Index (for US), and MSCI Emerging Marl<ets 1M I Index. All returns in USD and net of withholding tax on dividends. MSCI data © MSCI 2018, all rights reserved. UAE and Qatar have been reclassified as emerging marl<ets by MSCI, effective May 2014. 22
Select Currency Performance vs. US Dollar 2017 Index Returns
Most developed market currencies appreciated against the US dollar in 2017. The euro and Danish krone appreciated the most with gains of almost 14%, while the Hong Kong dollar depreciated. In emerging markets, the Polish zloty and the Czech koruna appreciated more than 20%, while the Turkish lira depreciated over 7%.
Ranked Developed Markets Returns (%)
Euro (EUR)
Danish krone (DKK)
Swedish krona (SEK)
Israel shekel (ILS)
British pound (GBP)
Singapore dollar (SGD)
Australian dollar (AUD)
Canadian dollar (CAD)
Norwegian krone (NOK)
Swiss franc (CHF)
Japanese yen (JPY)
New Zealand dollar (NZD)
Hong Kong dollar (HKD) -0.82 r
13.85
13.70
10.96
10.86
1 9.48
J 8.10
___ ,1 8.02
I 7.03
1-5.24
-- 4.29
-3.54 -
1.99
Ranked Emerging Markets Returns (%)
Czech koruna (CZK)
Poland zloty (PLZ)
Hungary forint (HUF)
South Korean won (KRW)
Malaysian ringgit (MYR)
South African rand (ZAR)
Thailand baht (THB)
Chilean peso (CLP)
Taiwanese NT dollar (TWO)
Chinese yuan (CNY)
Indian rupee (INR)
Russian ruble (RUB)
Mexican peso (MXP)
Peru sol (P El)
Egyptian pound (E GP)
Colombian peso (C OP)
Philippine peso (P HP)
Indonesia rupiah (I DR)
Brazilian real (B RC)
Pakistani rupee (P KR)
Turkish lira (T RY)
-0.42
-0.70
-5.41
-7.23
1.97
0.59
20.50
20.13
13.36
12.82
10.85
10.46
9.88
8.91
8.30
Past perfonnance is not a guarantee of future results. Indices are not available for direct Investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. MSCI data © MSCI2018, all rights reserved. 23
Real Estate Investment Trusts (REITs) 2017 Index Returns
Non-US real estate investment trusts outperformed US REITs in 2017.
Total Value of REIT Stocks
World ex US $485 billion 251 REITs (23 other countries)
58°/o us $672 billion 101 REITs
Ranked Returns for 2017 (%)
Global REITs (ex US)
US REITs
Period Returns(%)
Asset Class
Global REITs (ex US)
US REITs
* Annualized
3.76
1 Year 3 Years * 5 Years * 10 Years*
15.64
3.76
4.78
4.97
5.49
9.09
2.05
7.07
15.64
Past perfonnance is not a guarantee of future results. Indices are not available for direct investment. Index perfonnance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones US Select REIT Index data provided by Dow Jones©. S&P Global ex US REIT Index data provided by Standard and Poo~s Index Services Group© 2018. 24
Commodities 2017 Index Returns
The Bloomberg Commodity Index Total Return advanced 1. 70% in 2017.
Aluminum was the strongest performer, posting a return of 29.94%. Zinc and copper followed with respective returns of 28.49% and 27.95%. Natural gas was the weakest performer, falling 36.97%.
Ranked Returns for Individual Commodities(%)
-12.91
-13.35
Aluminum
Zinc
Copper
Nickel
Heating oil
Brent oil
Gold
Cotton
Live cattle
Silver
WTI crude oil
Lean hogs
Unleaded gas
Soybean meal
Soybean oil
Soybeans
Corn
Wheat
Kansas wheat -15.73
Coffee -16.81
Sugar -26.08
I====::J 29.94
28.49
27.95
13.93
13.17
11.72
11.48
24.40
Natural gas -36.97 c::=====:J
Period Returns(%)
Asset Class 1 Year 3 Years* 5 Years* 10 Years*
Commodities 1.70 -5.03 -8.45 -6.83
* Annualized
Past performance is not a guarantee of future results. Index is not available for direct investment Index performance does not reflect the expenses associated with the management of an actual portfolio. All index returns are net of withholding tax on dividends. Securities and commodities data provided by Bloomberg.
25
Fixed Income 2017 Index Returns
Interest rate changes across the US fixed income market were mixed during the fourth quarter. The yield on the 5-year Treasury note rose 28 basis points (bps), ending at 2.20%. The yield on the 1 0-year Treasury note increased 7 bps to 2.40%. The 30-year Treasury bond yield decreased 12 bps to finish at 2.74%.
In terms of total returns, short-term corporate bonds declined 0.04% during the quarter but increased 1.85% for the year. Intermediate-term corporate bonds gained 0.17% for the quarter and 3.92% for the year.
The total returns for short-term municipal bonds were -0.65% for the quarter and 1.61% for the year. Intermediate-term municipal bonds fell 0.09% for the quarter but gained 4.70% for the year. Revenue bonds outperformed general obligation bonds for the year.
Period Returns (%)
Asset Class
Bloomberg Barclays Long US Go~mment Bond Index
Bloomberg Barclays US Corporate High Yield Index
Bloomberg Barclays Municipal Bond Index
Bloomberg Barclays US Aggregate Bond Index
Bloomberg Barclays US TIPS Index
US Treasury Yield Curve(%)
4
3
2
12/30/2016
,.~::fiii,_;:=:::::::=!~=====;;;::;;;;: 9/29/2017 ..... 12/29/20 17
0 5 10
Yr Yr Yr
Bond Yields across Issuers (%)
10-Year US Treasury
Municipals
1 Year 3 Years*
8.53 2.85
7.50 6.35
5.45 2.98
3.54 2.24
3.01 2.05
AAA-AA Corporates
5 Years*
3.49
5.78
3.02
2.10
0.13
30 Yr
A-BBB Corporates
* Annualized
10 Years*
6.49
8.03
4.46
4.01
3.53
Citi World Go~mment Bond Index 1-5 Years (hedged to USD) 1.13 1.21 1.23 2.13
ICE BofAML 3-Month US Treasury Bill Index 0.86 0.41 0.27 0.39
ICE BofAML 1-Year US Treasury Note Index 0.57 0.49 0.38 0.90
Past perfonnance is not a guarantee of future results. Indices are not available for direct investment. Index perfonnance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the S&P National AMT -Free Municipal Bond Index. AAA-AA Corporales represent the Bank of America Merrill Lynch US Corporales, AA-AAA rated. A-BBB Corporales represent the Bank of America Merrill Lynch US Corporales, BBB-A rated. Bloomberg Bardays data provided by Bloomberg. US long-term bonds, bills, inflation , and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook"' , Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Citi fixed income indices© 2018 by Citigroup. ICE BofAML index data © 2018 ICE Data Indices, LLC. The S&P data are provided by Standard & Poo~s Index Services Group. 26
Impact of Diversification 2017 Index Returns
These portfolios illustrate the performance of different global stock/bond mixes and highlight the benefits of diversification. Mixes with larger allocations to stocks are considered riskier but have higher expected returns over time.
Ranked Returns for 2017 (%)
100% Stocks
75/25
50/50
25/75 6.33
100% Treasury Bills 0.80
24.62
Period Returns (%) * Annualized
10-Year
Asset Class 1 Year 3 Years* 5 Years* 10 Years* STDEV1
100% Stocks 24.62 9.89 11.40 5.22 16.80
75/25 18.23 7.54 8.59 4.26 12.59
50/50 12.1 4 5.1 5 5.79 3.1 1 8.38
25/75 6.33 2.75 3.00 1.78 4.18
100% Treasury Bills 0.80 0.34 0.21 0.30 0.16
Growth of Wealth : The Relationship between Risk and Return Stock/Bond Mix
$100,000 100% Stocks
$80,000 75/25
$60,000 50/50
$40,000
$20,000
$0 01/1988 01/1991 01/1994 01/1997 01/2000 01/2003 01/2006 01/2009 01/2012 01/2015 12/2017
1. STDEV (standard deviation) is a measure of the variation or dispersion of a set of data points. Standard deviations are often used to quantify the historical return volatility of a security or portfolio.
Diversification does not eliminate the risk of marl<et loss. Past performance is not a guarantee of future results. Indices are not available for direct investmenllndex performance does not reflect expenses associated with the management of an actual portfolio. Asset allocations and the hypothetical index portfolio returns are for illustrative purposes only and do not represent actual performance. Global Stocks represented by MSCI All Country World Index (gross div.) and Treasury Bills represented by US One-Month Treasury Bills. Globally diversified allocations rebalanced monthly, no withdrawals. Data © MSCI2018, all rights reserved. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook"', Ibbotson Associates, Chicago (annually updated wor1< by Roger G. Ibbotson and Rex A. Sinquefield).
..
27
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There are no investment strategies that guarantee a profit or
protect against loss. Diversification doesn't ensure a profit or
guarantee against loss. All indexes are unmanaged and an
individual cannot invest directly in an index. Index returns do
not include fees or expenses. Past performance doesn't
guarantee future results .
Equity investing involves market risk, including possible loss of
principal. Investments seeking to achieve higher rates of return
generally involve a higher degree of risk of principal. In general
the bond market is volatile, and fixed income securities carry
interest rate, market, inflation , credit and default risk. Any fixed
A UNITED CAPITAL .. FINANCIAL LIFE MANAGEMEN r
income security sold or redeemed prior to maturity may be
subject to a substantial gain or loss. International investing
entails special risk considerations, including currency
fluctuations, lower liquidity, economic and political risks , and
different accounting methodologies.
Investments in commodities may be affected by the overall
market movements, changes in interest rates and other factors
such as weather, disease, embargoes and international
economic and political developments. Commodities are
volatile investments and should form only a small part of a
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additional risk. An investment in commodities may not be
suitable for all investors.
International investing entails special risk considerations,
including currency fluctuations, lower liquidity, economic and
political risks, and different accounting methodologies.
REITs may be subject to greater volatility than investments in
traditional securities and pose special risks. The value of real
estate and portfolios that invest in real estate may fluctuate
due to losses from causality or condemnation , changes in local
and general economic conditions, supply and demand , interest
rates , property taxes , and regulatory limitations on rents,
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28
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