Market Insights - April 2017
The first three months of 2017 began with the inauguration of a new President, a Republican-controlled Congress, and the expectation of a speedy repeal of Obamacare, one that would help fund a laundry list of anticipated tax reforms and tax cuts. The quarter ended with a surprising rejection of the healthcare replacement bill, an administration battered by infighting and plunging approval ratings, and the triggering of Article 50, beginning the Brexit process, and ushering in a new and uncertain alignment in Europe. Yet throughout, investor enthusiasm and consumer confidence rose to levels not seen since December 2000.
Large U.S. company stocks, as measured by the Dow, added nearly 5% for the first quarter, while the broader market measure of the S&P 500 rose 6.3%. The Nasdaq outperformed other indices, gaining 10%, as technology companies took over market leadership from banks and financials. Smaller stocks measured by the Russell 2000, rose 2.2%, while international developed market stocks gained 6.47%, Emerging markets dominated equity returns, adding 11.4%.
Bond prices and yields, however, have been hedging the strong equity market expectations. The 10-year U.S. Treasury benchmark bond was priced to yield 2.47% before the Fed raised rates in December. After two rate hikes, the same bond was yielding…2.47%. While this seemed to fly in the face of reason for many investors, credit markets remained unsure of the promised tax and infrastructure stimulus, and much to the relief of bond investors, continued to price in low inflation and more modest growth expectations. Overall, most sectors of the bond market made fractional gains in the first quarter, with the strongest results coming from long-term Treasuries and the corporate high-yield sector.
During the final weeks of March the Federal Reserve, in various speeches and testimony, painted a picture of an economy with consistent growth and job creation, nearly full employment, and rising wages; in other words, an economy in pretty good shape, and able to sustain a series of two or three more incremental rate increases over the coming 12 months. Investors, though, have been pricing in the expected tax cuts, and their enthusiasm has been fueled as well by the perception of a businessmen’s administration that is cutting regulation, and making very bold projections for GDP growth. All of this, of course, sets a significantly higher bar for stock prices, and leaves the broad market more vulnerable to short-term disappointments.
In the near-term we think the real story, which has been overshadowed by much political drama, is rising earnings and profits. Just a few months ago analysts were uncertain about how and when the three-year long drought in corporate earnings would end. Now, consensus projections for the first quarter 2017 S&P 500 earnings growth are plus 9.1% over the previous year, and the trend is expected to continue through 2017.
Markets now, as always, are vulnerable to a correction (or a melt-up), and don’t need a reason, although there are always plenty of after-the-fact explanations. We know that stock market prices swing back and forth in a wide swath that has little to do with their eventual outcomes. Obsessing over the next downswing or cheerleading the most recent advance doesn’t add much to value. Our experience has shown us that disciplined asset allocation policies promote confidence when markets stumble, and keep our emotions in check when they surge.
The Bedminster Group marked our 20th year in business this April 1, 2017. We count ourselves very fortunate to have such an extraordinarily loyal and steadfast group of clients over the years, and all of us want to thank you. When we opened our doors for business on April 1, 1997 (with our dial-up internet connections!) it would have been hard to image the turbulent two decades to follow, including two major recessions, one of which nearly led to a global financial collapse, the world changing events of September 11, 2001, and much more. The Dow closed at 6,611 that day; over the next twenty years it has risen more than 212%.
We look forward to the future with all of you.