Global equity markets rose 7.1% during the first quarter, as measured by the MSCI ACWI Index, and outperformed the 1.8% return for the Bloomberg Barclays Global Aggregate Bond Index. Stocks recorded solid gains through mid-March, but pulled back with the failure of President Trump’s healthcare bill. This reduced confidence in Trump’s ability to carry out policy initiatives favoring lower taxes and infrastructure spending. The market demonstrated resiliency, in view of positive economic data, and recovered by quarter-end. Global bonds rose as bond yields declined amid political uncertainty in the U.S. and Europe. The S&P 500® Index of US stocks returned 6.1% for the quarter, but trailed global equities. Small caps reversed some of the gains made following the presidential election, with heightened scrutiny around policy initiatives and tax reform. Technology stocks led other sectors on expectations for strong quarterly earnings reports. Energy stocks declined on lower oil prices, with higher US output and uncertainty surrounding OPEC supply cuts. Dividend stocks were mixed as lower bond yields benefited higher income sectors such as Utilities, but Real Estate was hurt by weaker future prospects for mall and retail properties.
The MSCI ACWI ex-USA Index of international stocks outperformed US stocks with an 8.0% return for the quarter, lifted by strength in foreign currencies versus the US dollar. International stocks returned 5.3% in local currency terms. European stocks benefited from positive economic data and less political uncertainty, with Britain starting the process of “Brexit” and diminished prospects for Le Pen to win the French presidential election. Asian markets saw some of the larger gains, with lessened fears surrounding US trade policy. Emerging markets returned 11.5%, led by strong returns in China and South Korea, while stocks in Latin America also rebounded.
In fixed income, the Bloomberg Barclays US Aggregate Bond Index returned 0.8% during the quarter, as reduced expectations for economic growth drove long-term bond yields lower. Most sectors were in positive territory with longer maturities outperforming short-term issues. The larger gains were seen in the more credit-sensitive sectors, particularly high yield, as credit spreads tightened. International bonds were lifted by the appreciation in the yen and euro versus the US dollar. Emerging market bonds benefited from the stabilization in commodity prices and improved growth outlooks for developing regions. Economic Highlights
The US economy grew 2.1% during the fourth quarter of 2016, but decelerated from the 3.5% pace for the third quarter. Early estimates from the Federal Reserve of Atlanta indicate that GDP slowed to 1.2% in the first quarter of 2017, held back by weakness in consumer spending. Corporate earnings for S&P 500 companies are expected to rise 9.1% in the first quarter, based on FactSet estimates as of quarter-end. This would be the highest year-over-year increase since the fourth quarter of 2011. Technology companies are expected to drive the larger gains, while Energy companies should see improved results from previous quarters.
The Federal Reserve (Fed) increased short-term rates to 0.75% - 1.0% at the March FOMC meeting – only the third increase since 2006. The unemployment rate was 4.7% in February, which was within the Federal Reserve’s longer run target of 4.5%-5.0%. The Consumer Price Index inflation rate rose 2.7% for the 12-month period through February, lifted by higher Energy prices. Core inflation (excluding Food and Energy) rose 2.2%, which alongside other measures were close to the Fed’s 2% policy objective. In view of the economic progress, the Fed maintained its projections for two more rate hikes during 2017. Outlook
The “Trump Bump” continued to be a tailwind for markets during early 2017, despite some concern over the implementation of pro-growth initiatives. Market volatility for US stocks was surprisingly low relative to history. The CBOE Volatility Index® averaged 11.7 in the first quarter, below the long-term average of 19.6 going back to the index’s 1990 inception. In addition, the S&P 500 had only one day with a decline of more than 1%, occurring on March 21, as complications arose around Trump’s healthcare proposal. The bill was pulled in the following days with the focus shifted to tax reform, and the markets responded favorably.
A big story during the first quarter was the divergence between “soft” and “hard” economic data. While consumer confidence and business surveys were mostly optimistic, reports on retail sales, housing and business spending were more mixed. This translated to a wide range of forecasts for Q1 GDP growth, with consensus estimates ranging from 1.2% to 2.2%. Interestingly, the Federal Reserve Bank of New York’s estimate of 2.9% was considerably higher than other forecasts. This conflicted with many economists’ expectations for slower economic growth in Q1, with a pick-up anticipated to come later in the year. Global diversification proved valuable within investment portfolios to start the year, as international stock allocations outperformed US markets. Many tactical strategies also benefited from higher exposure to equities, amid low levels of market volatility. Looking ahead, valuations on international stocks, particularly emerging markets, are low relative to their US counterparts, which supports broader market allocations. With the extended bull market for stocks and bonds, Tactical and Diversifying strategies could also play an important role as part of well-diversified portfolios, providing flexibility to position across a range of environments.
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This material was prepared by Asset Mark and does not necessarily represent the views of the presenting party, nor Ameritas Investment Corp. (AIC). Asset Mark is not affiliated with the presenting party or AIC. This material represents an assessment of the market environment at a specific point in time and is not intended to predict future results. The performance mentioned herein is past performance and is not indicative of future results. All information is gathered from sources believed to be reliable; however we make no representation as to its completeness or accuracy. Market indices are unmanaged and cannot be invested into directly. Neither the presenter nor AIC are providing tax or legal advice. Please consult your tax advisor or attorney regarding your situation.