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This year’s opening quarter saw gains across most indices, even globally. The S&P 500 Index finished the quarter up just over 6%, with large cap outperforming small and mid cap stocks (a reversal of what we saw for much of 2016), Technology, Consumer Discretionary, and Healthcare sectors outperforming their peers, and Energy significantly lagging. The US markets in general have responded positively to Trump’s policy plans, and it’s looking as though earnings had a surprisingly positive quarter, as well.

Emerging markets saw a particularly strong quarter (the MSCI Emerging Markets was up over 11%), thanks in large part to increased trade, but the eurozone and Asia also posted notable gains. 

As we talked about last quarter, countries’ balance sheets are growing thanks to accommodation by central banks, such as the European Central Bank and the Bank of Japan, so we’ve seen synchronized global expansion continue throughout the quarter. In many ways, China is carrying the emerging markets, or certainly bolstering them, as it continues to deliver positive economic news and post significant stock market gains, but still mainly as a result of policy stimulus. Regardless, global growth is positive, and has helped set a bright tone for the start of 2017.

Politics Rule
Despite general positivity within the markets and economy this year, the news has still played a role in investor sentiment. Obviously what dominates the news on a global scale changes over time depending on various world events, but if this year’s news has any sort of theme it’s certainly politics, especially domestically. At times it might be international conflict, other times it’s economic crises, but in the first quarter, American politics took much of the spotlight. And since we know that the markets are often driven by news, we’ve seen much of the market movement the last month or so swinging in tandem with positive or negative political headlines. The markets have responded positively to President Trump’s expansionary policy plans (tax cuts, deregulation, and infrastructure spending) - business and consumer sentiment have both rallied - but when Congress failed to pass a new healthcare bill, the markets certainly noticed. Investors have been reminded that plans are just plans until they come to fruition, and their caution is beginning to take over again as we head into the second quarter. 

We don’t see this uncertainty ending anytime soon, especially given that it’s still very early on in a new presidential term and many of President Trump’s campaign platform policies are far from underway. However, we are also anticipating further complications to the political scene from geopolitical nuances heading into the second quarter. North Korean threats and the Syrian chemical attacks are both top-of-mind as we move forward. 

Weathering the Storm

The first couple months of the year saw unusually warm temperatures, even record breaking averages in some areas, but March bucked the trend with colder temperatures and a bad storm in much of the Northeast. Those positive impacts we saw in the job market early in the year (think: construction, factory, retail) were reversed, or really just normalized, through the end of the quarter.

However, the underlying health of the labor market is holding strong and steady, and most other fundamentals point to a pretty clean bill of health, as well. Economists are predicting higher GDP growth this year than last. Despite the decrease in hiring and increased number of layoffs this quarter, the overall unemployment rate is the lowest it’s been in nearly a decade – 4.5%.  We are on track to reach full employment levels this year, and the Federal Reserve Bank’s actions this quarter have supported this belief. In March, the Federal Open Market Committee raised its overnight interest rate by 25 basis points, and it has said it will likely raise rates a couple more times throughout the remainder of the year. In working towards more normalized monetary policy (i.e. less accommodative), the other half of the puzzle to be addressed by the Fed is its $4.5 trillion balance sheet consisting of Treasuries and mortgage-backed securities purchased over the last several years to buoy the fragile economy. Fed officials have suggested beginning to draw down these assets in 2017, assuming they maintain their confidence about economic health and employment levels in the US. Regardless, there are many details still to be worked out in the coming months, including, at minimum, the timing and magnitude of such actions. The Fed is also prepared to assess potential impacts of President Trump and a Republican Congress’ policies (the potential for higher inflation and interest rates is very real), but to date, members’ views have been relatively unaffected.

What's In Store

If there is any sort of thematic concern that we are hearing from people the past few months, it is concerns over whether it is time to sell out of the market. Investors have different reasons for expressing this sentiment, but they revolve around all-time highs for the S&P 500 and Dow Jones Industrial Average, uncertainty surrounding Trump’s presidency, and the perception of high stock market valuations. None of these are irrational or illogical at all, and we understand why investors may feel concern. After all, we did not wholly predict this behavior in the stock market after November’s election, as we mentioned last quarter as well. However, our overwhelming belief is that this is not a time to sell out of the market. 

While we have been experiencing a bull market for eight years now, it is difficult (and not prudent) to predict when the bear will rear its head. Timing this sort of thing has proven to not only be incredibly unreliable, but staying in the market across swings is a better choice for most investors from a long-term perspective. Experiencing even a few winning days in the stock market over a year can often make a remarkable difference in long-term performance, and therefore missing those gains is equally significant. Not only that, but timing a move back into the market after selling out is equally hard and equally risky.

Although some stocks are highly valued, corporate earnings are more critical than ever and had a promising first quarter. According to analysts, earnings may have seen double-digit growth in the first quarter, a significant change from what we’ve been experiencing for several quarters. If earnings growth is real and continues, this can provide a basis for growth in stock market prices. 

We do not have expectations of a gangbusters year in the market, even on the heels of a pretty solid start, because the formula for such isn’t exactly in the cards this year. Therefore, we understand investors’ concerns, but encourage our clients to stay in the market and ride out a most likely slow and steady year, despite possible blips from the political or geopolitical scene. And speaking of such blips, we will be keeping watch for opportunities from new policy action here at home, as well as anticipating volatility abroad (more eurozone elections, Brexit negotiations, etc.). 

For now, we continue to use our recently improved methodology for analyzing individual company names within each sector, their growth potential, as well as their associated risk, while considering the big-picture global economic scenario. As always, if you have any specific questions or concerns, we encourage you to speak with your portfolio manager to discuss these or other topics further.
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