The US Equity market continued its march higher during the first quarter of 2017, with the S&P 500 index returning just north of 6 percent. Fixed income, as measured by the Barclays US Aggregate index managed a small gain, returning 82 basis points.
Politics and Federal Reserve policy dominated the discussion surrounding financial markets in the first quarter. Excitement over President Trump’s promises to cut taxes and regulation drove stocks in the first quarter. However, with the defeat of the President’s attempt at healthcare reform, market participants began to curb their enthusiasm regarding the President’s agenda. Positive momentum in large cap equities stalled during March, while small cap equities, which would be most sensitive to tax reform suffered a loss during the last month of the quarter. It remains to be seen whether the President will be able to push through tax reform by the end of the year as originally expected. Small cap equity may be in for a bumpy ride while the Republican Congress gets its act together.
Federal Reserve policy also received plenty of attention, as expected. In March, the Federal Reserve raised its benchmark rate by 25 basis points, while predicting a total of 3 rate rises through the end of 2017. Steady economic improvement was the catalyst for both the March rate increase and the expectation of further increases throughout the remainder of the year. Banks are expected to benefit from continued rate increases, as rates paid on deposits have remained flat while rates charged for loans have increased.
Economic indicators have been trending in the right direction. Consumer confidence is as high as it has been during the past 10 years. Unemployment remained low, checking in at 4.7 percent on the February reading. Should this economic momentum continue, the Fed may even consider fourth rate increase this year.
Equity investors will once again turn their attention to corporate earnings as support any continuation of gains in the stock market. According to FactSet, earnings by the S&P 500 constituents are expected to grow upwards of 9 percent year-over-year. Energy and Financial companies are expected to lead the way. A realization of the projected gain in earnings would go a long way to justify the above average P/E ratio that has been a concern to bulls for quite some time. Also, the equity market’s move higher has come in the face of rising short interest. Positive earnings surprises may force shorts to reconsider their positions, providing an additional tailwind for the market.
Earnings expectations data from “Earnings Insight” published by FactSet on March 24, 2017
Return data from LPL Financial Research
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. The prices of small and mid-cap stocks are generally more volatile than large cap stocks.