We favor U.S. and emerging market (EM) equities for tactical global allocations. After reviewing our thoughts on the U.S. equity markets in last week’s Weekly Market Commentary, we thought we’d expand our 2018 equity outlook with a focus on global markets. From a regional perspective, we favor the U.S. and EM over developed foreign markets broadly, although the improving outlook in Japan is noteworthy.

International Equities Performance Review

The year 2017 was excellent for international equities, especially for EM. The MSCI EAFE and EM indexes returned 25.6% and 37.8%, respectively, both ahead of the S&P 500

As we entered 2017, we expected that steady growth and up to three Federal Reserve (Fed) rate hikes would drive low- to mid-single-digit returns in the broad high-quality bond market. In the end, with three Fed rate hikes in 2017 and a total return of 3.7% for the Bloomberg Barclays U.S. Aggregate Bond Index, these forecasts aligned with reality. Our expectation that the 10-year Treasury yield would end 2017 in the 2.25% – 2.75% range was also met, with the 10-year yield ending the year at 2.41%.

Our favored high-quality sectors were relative winners for the year as well. Corporate bonds, as measured by the Bloomberg Barcla

2017 was an impressive year for equities, as many countries closed out the year at new all-time highs. The fixed income markets also responded favorably, as demand for both sovereign and corporate bonds remained strong with inflationary pressures still benign. Driving much of the impressive gains in financial markets were strong economic growth and a synchronized increase in global earnings.

In the United States, some of the most meaningful economic developments included:

GDP growth. Gross domestic product (GDP) growth saw the usual first quarter weakness, coming in at only 1.4%. Things turned around in the second an

2017 was truly a remarkable year for the U.S. stock market with record breaking abound. The S&P 500 Index produced 12 positive monthly returns for the first year ever. The Dow Jones Industrials Average produced 71 record highs — its highest total ever. And the year proved to be one of the least volatile in the history of the VIX Index, with some of the lowest volatility readings ever and without so much as even a 3% pullback, despite significant geopolitical uncertainty worldwide.

The strong year for stocks was driven by several factors but we attribute the gains primarily to the following:

Synchronized glo