Equities rounded out a banner year with additional gains on the back of strong earnings and economic growth. Maintaining their lead, emerging market stocks returned 3.6% in December, according to the MSCI EM index, racking up gains of 37.9% in 2017. The S&P 500 was up 1.1% on the month and—setting a new record—was in the black every month of the calendar year.

The Fed raised rates in December, for the third time in 2017, despite inflation remaining below the central bank’s target levels. In response, the yield curve continued to flatten with the 10-year unchanged at 2.41% and the 30-year down nine basis points to 2.74%. While the 10-year ended only four basis points lower than at the end of 2016, the 10-2 spread declined to its lowest level in nearly a decade. As has been the story for most of the year, longer-duration fixed income fared well with the Barclays Long Credit Index and Barclays Long Treasury Index up 2.0% and 1.7%, respectively, in December.

As we turn the page to 2018, our views at NEPC remain mostly unchanged. Despite significant run-ups in international equities, we still find non-US stocks attractive relative to domestic equities, given the potential for continued growth in international developed and emerging economies. Within fixed income, we suggest investors shift away from credit risk as spreads have fallen well below median levels in both US investment-grade and high-yield spaces and, as such, future return expectations have declined. We also remind investors of the importance of rebalancing back to target, particularly in light of the recent sustained outperformance of equities.