US equities capped off 2017 with a flourish as large growth stocks continue to dominate market performance. 2017 returns surprised on a number of fronts. With a 21.83%1 total return for the S&P 500 Index, magnitude was unexpected.

Volatility Is Back Again

After a long hibernation, volatility returned with a vengeance to equity markets in early February. Prior to this resurgence, the market experienced the longest run in its history without a five percent correction. Yet just as investors can naturally become too complacent when the market is setting new record highs every other day, it’s also normal human behaviour for them to overreact when markets turn violently downward.

S&P 500 and VIX: 8 November 2016 to 5 February 2018

Source: Bloomberg, as of 5 February 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

Prospects of rising inflation and higher rates have also combined to the equity sell-off in February, as benchmark US Treasury 10-year bond yield traded at its highest since 2014. Inflation has been at remarkably low levels, so some type of pickup should come as a surprise, but any acceleration is likely to be limited. In any case, US large caps (S&P 500 Index) and US small caps (Russell 2000 Index) have historically performed well during the recent rate hike cycles.

Source: Bloomberg, as of 31 January 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. Shaded areas represent rate hike periods.

US Tax Reforms

The US$1.5 trillion tax package is expected to help the US become more competitive with the rest of the world. An indirect effect on corporate earnings would come through stronger Gross Domestic Product (GDP) growth. Goldman Sachs estimate a 30 basis points boost in both 2018 and 2019, with the lowering of the corporate tax rate representing a powerful boost to earnings. Two groups in particular are likely to benefit from lower taxes: higher tax payers in general and small companies2.


Tax cuts should benefit small-caps more than large caps in terms of incremental 2018 Expected Earnings Growth

Source: Furey Research Partners and Factset, as of 7 December 2017. Considers profitable companies only.

Opportunity For Value Investors

While it’s still too early to tell when the current sell-off will stop and how far prices will ultimately fall there are numerous indicators that suggest the economic fundamentals are in place to support further gains in equities when the correction settles.

Among these:

  • U.S. and global growth is positive
  • Corporate earnings growth in the U.S. is continuing
  • Consumer spending is supported by low unemployment and potentially stronger wage growth


Source: Bloomberg, as of 12 January 2018. Past performance is not indicative of future performance.


Market corrections can be healthy for both the market and investors, allowing an opportunity to consolidate recent gains and prevent a more serious situation of overvaluation from developing before going toward higher highs. A correction can be an opportunity for value investors to purchase stock in good companies at bargain prices and can also signal a change in future market leadership. In addition, corrections provide a chance for investors to reassess how comfortable they are with market risk, and to make adjustments to their portfolio if warranted.

The most important thing to remember is don't panic. Don't let temporary market conditions derail your long-term investment plan. Panicking can lead to decisions that result in unnecessary losses, which can impede long-term potential. Be patient; stay diversified, work with active managers that have experience through various market cycles.

Find out more about our suite of flagship US equity funds



Market Insights


1 Source: Bloomberg, as at 31 December 2017.

2 Higher tax payers: these companies can be found across sectors. Small companies are widely considered to pay higher taxes than large caps. According to Credit Suisse, the effective tax rates are 32% and 26% respectively. This is due to (1) small caps being more domestically tilted than their large cap counterparts, generating approximately 85% of their revenues from the US compared to 75-80% (Furey Research Partners) and (2) tax minimisation schemes and loopholes being less accessible to resource poor small businesses.

Source: Legg Mason, ClearBridge and Royce. This document, provided by Legg Mason Asset Management Singapore Pte. Limited (“Legg Mason”) (Registration Number (UEN): 200007942R), is for information only and does not constitute an offer or solicitation to buy or sell any units in any fund.

The Legg Mason ClearBridge US Large Cap Growth Fund and Legg Mason ClearBridge US Aggressive Growth Fund may invest in certain types of derivative instruments for efficient portfolio management purposes. Please refer to the prospectus for more information.

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