• As 2017 came to a close, the S&P 500 Index continued its progress on what has been an unprecedented run. December 31, 2017 marked its 14th consecutive month of positive returns.25 Never before has the S&P 500 Index generated positive monthly returns for so long a period.25 In fact, its last negative monthly return came in October 2016, when it returned approximately -1.8%.25
  • However, there is a strong relationship between equity valuations and forward returns. Periods of high equity valuations have historically been followed by relatively low future returns, and the inverse is true for periods of low equity valuations.
  • The recent string of positive equity returns has been even more remarkable because it has come amid historically low levels of volatility.
  • For example, the S&P 500 Index did not experience a single move, up or down, of 1% or more in 2017. It averaged almost 22 such days in each of the previous four years.26 Using another indicator, the CBOE Volatility Index, which measures market expectations and near-term equity volatility, averaged just 11.1 for the year and spent much of 2017 below 10.27 For context, this was far below the index’s historical average of approximately 19.1.27
  • While no one knows for certain what the future holds for stock market performance, investors might be wise to watch market conditions should volatility once again enter the markets in 2018.

1 Federal Reserve Bank of St. Louis, DJIA, http://bit.ly/2jZjDYt.
2 BBC, http://bbc.in/2m32GP5.
3 USA TODAY, https://usat.ly/2Aw9Srt.
4 ICE BofAML U.S. High Yield Master II Index.
5 ICE BofAML U.S. 10-year Treasury Index.
6 ICE BofAML U.S. Corporate Master Index.
7 Credit Suisse Leveraged Loan Index.
8 ICE BofAML U.S. High Yield CCC Rated & Lower Index.
9 ICE BofAML U.S. High Yield B Rated Index.
10 ICE BofAML U.S. High Yield BB Rated Index.
11 Credit Suisse Leveraged Loan Index (CCC rated component).
12 ICE BofAML U.S. High Yield Master II Index (yield-to-worst).
13 ICE BofAML U.S. Corporate Master Index (yield-to-worst).
14 Credit Suisse Leveraged Loan Index (yield-to-a-three-year maturity).
15 U.S. Federal Reserve, FOMC minutes, http://bit.ly/2lYuhQJ.
16 U.S. Federal Reserve, Economic Projections, http://bit.ly/2Bh8q0L.
17 Federal Reserve Bank of St. Louis, U.S. 10-year yield, http://bit.ly/29ecBfp.
18 Bureau of Labor Statistics, http://bit.ly/2iYbHWM.
19 Institute for Supply Management, Manufacturing Index, http://bit.ly/2u7Z6Fq.
20 Institute for Supply Management, Non-Manufacturing Index, http://bit.ly/2g2jSi6.
21 Federal Reserve Bank of St. Louis, S&P 500, http://bit.ly/2d3pN5b.
22 Federal Reserve Bank of St. Louis, VIX, http://bit.ly/295DSwP.
23 Econoday, http://bit.ly/1iJOdAP.
24 Bureau of Labor Statistics, CPI, http://bit.ly/2jKLr2f.
25 Bloomberg based on total returns for the S&P 500 Index.
26 Bloomberg and FS Investments, as of January 4, 2018.
27 CBOE, http://bit.ly/2lSZupx. Historical average between January 2004 and December 2016.


The Alternative Thinking Week in Review market commentary and any accompanying data (“Market Commentary”) is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The Market Commentary is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such Market Commentary. The Market Commentary should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the Market Commentary or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.