The first quarter of 2017 was dominated by political headlines and firming economic data globally. Risk assets continued to outperform relative to fixed income over the course of the quarter even though fixed income rallied in late March.
Emerging market equities significantly outperformed many asset classes in Q1, up 11.5% through the end of March due to the expectation of improving global economic momentum creating better trade prospects for Emerging Markets countries. Political risks in the US and Eurasia seems to have taken a back seat to encouraging economic growth.
Many sentiment measures cooled off in March as Trump’s health-care plan died in Congress, and investors worried it meant the remainder of of the administration’s pro-growth agenda could hit roadblocks on the way to becoming law – or not. Several high profile strategists, such as Dr. Ed Yardeni, are wrestling with doubts of the “Trump Bump” without seeing improved corporate earnings fundamentals.
During the first quarter, the US Economy continues to be supported by improving job growth, and a recent surge in consumer, business and investor confidence. The unemployment rate of 4.7% remained near cyclical lows, and was one data point the Federal Open Market Committee (FOMC) considered in its March meeting to raise short-term interest rates.
The global economic landscape continues to improve, with the US dollar’s appreciation helping prospects for foreign economies exporting to the US. The Eurozone continues to recover due to strong exports and a healthier housing market.
Equity markets continued their recent trend of strong performance in the first quarter, as the S&P 500 has closed up for the sixth straight quarter. Stock prices gained ground right from the beginning of January and the so-called “Trump Bump” continued until the middle of March when Congress shelved health care legislation due to a lack of support. Small cap stocks underperformed large caps for the first time in several quarters. For investing styles, growth tended to outperform value stocks in the quarter. International stocks, as measured by MSCI EAFE, was up 7.3% for the quarter as global investor confidence is growing.
As analysts had expected, the FOMC ended its March meeting by raising the federal funds rate by 0.25% to a range of 0.75%-1.00%. As was the case over the last half of 2016, the primary drivers of fixed income prices in the first three months of ‘17 were the anticipation of a FOMC rate hike, an improving economic outlook, and record stock prices. The fixed income markets also digested the inauguration of President Donald Trump and his first weeks of office.
