1st Quarter's Rearview Review

With the 1st quarter of 2017 in the books, we wanted to briefly update you on the market movers and shakers.  In general, it was a positive quarter.  Politics and foreign affairs have dominated the media cycle.  And the markets, until recently, have managed to head in only one direction—up.  From a big picture point of view, volatility has been subdued since the US election to a degree rarely seen for such a long period of time.  The 1st quarter experienced the lowest quarterly volatility since 2006.  Is this complacency or are investors correct in extrapolating what the very positive sentiment numbers might mean for the outlook of the economy?  It has been a good start to the 2017 trading year.  Will it continue?  Time will tell.

In the meantime, here are a couple of quick observations on the first quarter of 2017.  During the first three months, the S&P 500 index was up 5.5%, the US aggregate bond index was up 0.7%, and the VIX volatility index fell by 10.2%. The Federal Reserve declared the US economy strong enough to handle a rate increase and raised the short-term benchmark rate by 0.25 percentage points.  This was the first of 3 moves the Fed said it is planning to make this year. 

One thing we found interesting was that Fed members engaged in a coordinated effort to hit the main stream media with talk of potentially raising rates at an even faster pace or starting to “sell back” some of the bonds they previously purchased during their “Quantitative Easing” programs.  This would effectively be “Quantitative Tightening.” It would have a similar effect as raising interest rates and is consistent with the Fed’s change from easing to tightening that began with its first interest rate hike in December 2015.  However, after the Fed seemed to be reassuring equity market for so many years that it was supportive, we find it interesting that the Fed now seems ready to let some of the air out of the life raft and see how both equity and bond markets respond. 

Here are a few highlights and “not-so-high-lights” from the quarter.  The Dow and the S&P reached all-time highs without any real sell-off in bonds, even after the rate increase.  This suggests that equity markets and bond markets are still in disagreement about longer-term growth prospects.  Technology, Healthcare and Emerging Markets experienced a strong quarter, while Energy, Retail, and Commodities struggled.  On the international front, there has been very little fallout from Brexit proceeding and minimal market impact from geo-political tensions with Syria and North Korea.  Trump’s handling of the military attack on Syria, in which he also sent a warning to Putin, seems to have been taken as a positive.  And North Korea’s belligerence seems to have put trade tensions with China on the back burner, at least for now.  On the home-front, however, it would appear that equity markets are pausing for a reality check after President Trump’s failure to repeal or even reform President Obama’s healthcare legacy. 

Some of the shine appears to have faded from the “Trump Bump”.  While the S&P 500 Index was flat in March, it closed the month below its March 1st peak, creating a negative trend line, as concerns increased over President Trump’s ability to implement his pro-growth agenda. 

As the 2nd quarter gets underway we will certainly be listening very closely to the Fed, as well as paying attention to foreign elections and, for that matter, foreign relations.  In the meantime, we continue to maintain our allocations for our clients.