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Quarterly Market Commentary Q1 2017

Quarterly Economy

First Quarter 2017

Markets in Review

The stock market continued advancing in the 1st quarter as corporate earnings growth and the prospect of tax and regulation reform kept adding wood to the fire. For the quarter ending March 31, 2017, the Dow Jones Industrial Average was up 4.6%, the S&P 500 Index gained 5.5% and NASDAQ jumped an incredible 9.8%.

Asset Class QTD (%) 1 Year (%) Benchmark
U.S. Large Cap Stocks 6.07 17.17 S&P 500 Composite
U.S. Mid Cap Stocks 5.15 17.03 Russell Mid Cap
U.S. Small Cap Stocks 2.47 26.22 Russell 2000
U.S. Value Stocks 2.99 19.97 Russell 3000 Value
U.S. Growth Stocks 8.63 16.27 Russell 3000 Growth

Source: Morningstar Direct as of 3/31/2017

Asset Class QTD (%) 1 Year (%) Benchmark
Developed Market Stocks (USD) 7.25 11.67 MSCI EAFE (net)
Emerging Market Stocks (USD) 11.45 17.22 MSCI EM (net)
European Stocks (USD) 7.44 9.76 MSCI Europe (net)
Japanese Stocks (USD) 4.49 14.44 MSCI Japan (net)
Pacific Country Stocks (USD) 11.76 18.39 MSCI Pacific Ex Japan (net)

Source: Morningstar Direct as of 3/31/2017

Small Was Beautiful and So Were Mid and Large

After losing to value stocks in 2016, growth stocks outperformed during the first quarter of 2017. Small cap stocks – while underperforming their mid-cap and large-cap counterparts for the quarter – have returned a sizzling 26% return for the trailing year. But across the spectrum, stocks did well for the quarter and for the trailing one-year period.

Stock Markets

Around the Globe Improving economic conditions in the US and a declining US dollar helped international stocks to a strong quarter and emerging market stocks to a fantastic quarter.

Fixed Income

For most of the first quarter, the yield on the 10-year U.S. Treasury continued advancing from the low hit in July of 2016. By the middle of March, the 10-year Treasury yield hit 2.60%, but news that the Fed will target fewer rate hikes in 2017 helped pushed the yield down to 2.40% by the end of the quarter

Follow the Economy

No matter your political leanings, the reality is that the US economy is on solid footing. Consumer confidence readings are at levels not seen in 15 years; unemployment rates are hovering just under 5% and core inflation rate comes in at the Fed’s target of about 2%.
In addition, after we witnessed five consecutive quarters of negative year-over-year earnings growth, corporate earnings and revenue growth have returned. Fourth quarter 2016 earnings reports showed nearly two-thirds of companies on the S&P 500 beating their average earnings estimates and more than half of companies beat their average sales estimates.
In fact, the quarterly blended earnings growth rate for the S&P 500 came in at 4.9% - much higher than the forecasted 3.1%. First quarter 2017 earnings are also expected to be strong, with consensus forecasts suggesting earnings growth of 9.1%.

Trump Helping or Holding Back the Markets?

While solid economic data has fueled the stock markets to record highs, investors are optimistic that Trump’s primary campaign promises can push the market higher. Specifically, high expectations for corporate tax cuts, infrastructure spending and regulatory reform are feeding investor optimism. But as we got deeper into the first quarter and Trump experienced a few setbacks on immigration and health care reform, the markets paused a bit, especially after Trump’s unsuccessful attempt to repeal Obamacare and after the travel ban was blocked twice in the courts.

The Fed Yawned

One of the biggest yawners of the first quarter was the decision by the Federal Reserve to raise the federal funds rate by 0.25 percent in March. The market fully anticipated this hike given unemployment of 4.5%, inflation close to 2%, and since no one could accuse the Fed of trying to influence the presidential election. Shortly after the March fed funds increase, the Fed established expectations for two more rate hikes before the end of the year.

“Someone is sitting in the shade today because someone planted a tree a long time ago.”

  • Warren Buffett
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