The election year of 2016 was uncharacteristically volatile. While returns started out weak, the end result was far removed from the pessimism that dominated investor psychology for the first seven weeks of the year, with the equity bottom reached back in February of 2016. The presidential election in November 2016 triggered a sharp equity revaluation, aided by the Federal Reserve’s 25 basis-point rate increase at its December 2016 meeting. The Fed’s move was the first interest-rate hike in a year and only the second increase in more than a decade! U.S. equities rallied throughout this period as investors sold off long-dated bonds in anticipation of post-election economic growth, inflation and employment gains, lower taxes, more spending on the nation’s infrastructure and less business regulation.
As we made our way through the first quarter of 2017, optimism that the new administration will usher in business-friendly policy changes continued to drive positive and broad-based market sentiment. Large market-capitalization issues performed better than small-cap stocks, as evidenced by the returns of the Russell 1000 large cap Index of +6.0%, Russell 2500 mid cap Index of +3.8% and Russell 2000 small cap Index of +2.5%. Growth beat Value as evidenced in the Russell 3000 Value Index’s +3.0% performance lagging that of the Growth at +8.6%. Low-quality stocks—those with negative earnings, low returns on capital and high leverage—produced better returns (+5%) than their high-quality counterparts (+4%) for the first quarter, due chiefly to their strong return in January’s post-election stock euphoria.
We expect more volatility as political wrangling, geo-political tensions, and positive, but relatively tepid economic growth intersect.
U.S. equity returns continued to exceed those of fixed income classes in the first quarter: investment grade corporate bonds and long-term Treasuries both rose +1.4%. In a risk-on, growth-oriented environment, it’s no surprise that the metal commodities outpaced equities: gold jumping +8%, silver rising nearly +14%, and economically sensitive copper appreciating nearly +6%.
Looking around the world, equity markets were similarly strong as the MSCI World Index (excluding the U.S.) appreciated +5% in local currency and rose +8% when measured in U.S. dollars.
The implication being that responsible companies almost surely won’t commit capital until tax and regulatory changes are clarified.
During the post-election period from November 8, 2016 through March 31, 2017, across both large and small stocks, the cyclical Financial Services (+17.6%), Materials & Processing (+15.9%), Industrial/Producer Durables (+13.9%), and Technology (+13.6%) sectors jumped, while defensive Utilities (+7.9%) and Consumer Staples (+5.3%) sectors trailed. Looking ahead, we remain conscious that expansionary expectations evident in equity prices have yet to be met with delivery on political promises. We expect more volatility as political wrangling, geo-political tensions, and positive, but relatively tepid economic growth intersect.
Our recent conversations with company management teams, including more than a few with banks, provided little evidence of long-range business investments being launched, with the implication being that responsible companies almost surely won’t commit capital until tax and regulatory changes are clarified. At present, management teams do not know what the tax, trade, energy, or anti-trust rules will be, leading to capital projects generally remaining on the back burner.
This communication contains the personal opinions, as of the date set forth herein, about the securities, investments and/or economic subjects discussed by Mr. Vogel. No part of Mr. Vogel’s compensation was, is or will be related to any specific views contained in these materials. This communication is intended for information purposes only and does not recommend or solicit the purchase or sale of specific securities or investment services. Readers should not infer or assume that any securities, sectors or markets described were or will be profitable or are appropriate to meet the objectives, situation or needs of a particular individual or family, as the implementation of any financial strategy should only be made after consultation with your attorney, tax advisor and investment advisor. All material presented is compiled from sources believed to be reliable, but accuracy or completeness cannot be guaranteed.