Investor optimism pushed domestic equity markets higher during the 4th quarter, while increasing domestic bond yields and a strengthening U.S. dollar led to losses in the bond and international equity markets. The Federal Reserve raised the federal funds rate by 0.25% to a range of 0.50% – 0.75%.

The S&P 500 index ended the quarter up 3.8%, with traditional value-oriented sectors outperforming growth-oriented sectors. Financials led the S&P 500 higher with a gain of more than 21%, due to rising interest rates and the prospect of deregulation under the new presidential administration.

A strengthening U.S. dollar contributed to weakness in international market returns. The international equity market, measured by the MSCI ACWI ex US index, was lower by -1.3%, and emerging markets measured by the MSCI EM index, was lower by -4.2%.

The yield on the 10-year U.S. Treasury rose 0.85%, ending at 2.45%. Increased inflation expectations and further hikes by the Federal Reserve contributed to the rise in rates during the quarter. Prospects of fiscal stimulus, protectionism, and America-first policies by the new administration contributed to the increased inflation expectations.

The Federal Reserve hiked the federal funds rate to a range of 0.50% – 0.75% during the quarter and signaled for multiple additional hikes in 2017. The unemployment rate decreased from 5.0% to 4.7% during the quarter, due to continued job growth and a relatively unchanged labor force participation rate.

Headline inflation, which measures total inflation within an economy, including commodities such as food and energy, increased during the quarter to an annual rate of 1.7%.  Core inflation, which excludes food and energy, also slightly decreased to an annual rate of 2.1%. A sharp year-over-year increase in energy prices, including a 2.7% jump in gasoline, contributed to the increase in headline inflation.