EQM Capital LLC – 1Q 2017 Market Recap – Fundamentals Are Trumping the Trump Trade

Posted on Apr 4, 2017

First Quarter 2017 Market Recap

Building on post-election gains, the first quarter of 2017 finished with solid stock market performance, with the S&P 500 posting its biggest quarterly advance since the end of 2015, trading up 5.5%.  A brightening economic outlook offset investors’ waning enthusiasm for the Trump Trade.

Upbeat market sentiment, underpinned by hopes that the Trump Administration’s market-friendly policies would be written into law, has been fading. As a result, investors shifted away from “Trump trades” such as Financials and Industrials and began to bet on growth sectors such as technology. The tech sector in the S&P 500 jumped 12%, making it the best performing sector in Q1. The NASDAQ Composite gained 9.8%, for its best quarter since 2013.

Despite rising political uncertainty during the quarter, stocks have stayed the course and pullbacks have been reasonably minor. The CBOE Volatility Index, Wall Street’s fear indicator, posted its second-lowest quarterly average on record. And the average daily percentage change for the Dow Jones Industrial Average during the quarter was the lowest since 1965.

Up until March 21st, the S&P 500 had gone 64 consecutive trading days without declining more than 1% at any point in the trading session.  On that day, the market finally declined 1.24%, its sharpest decline since October.

The stock market has remained resilient because the economic data has been solid and confidence indicators strong. But the rally’s leaders have changed with investors pulling back from banks and infrastructure plays. The S&P 500’s financial sector declined 2.9% in March and industrials dipped 0.8%.

The failure of the Republican led Congress to repeal and replace the Affordable Care Act, has led investors to question the Trump administration’s ability to implement other items on its agenda such as corporate tax reform, looser regulations, and fiscal spending initiatives such as infrastructure.

Instead, investors have shifted their focus on companies that have the potential to serve up better-than-average returns such as technology companies. For example, Apple jumped 24% in the first quarter, lifted by solid iPhone sales and positive expectations for its next model.

Growth stocks, companies that investors expect to post stronger earnings during times of economic prosperity, have outperformed their value peers. The Russell 1000 Growth Index ended the quarter up 8.5%, far outpacing the 2.6% advance for the Russell 1000 Value Index.

The U.S. economy has continued to show signs of strength this year. The personal-consumption expenditures price index, the Federal Reserve’s preferred inflation gauge, exceeded the central bank’s target for a 2% annual gain for the first time in nearly five years, at 2.1%, and US economic growth in the fourth quarter was revised upward. Consumer and business sentiment indicators are also at high levels. Basically, fundamentals are “trumping” the Trump trade.

Why has the market has taken in stride the fact that the Fed raised rates in March and is planning to raise them twice again this year?

The economy is in the midst of a global growth pickup that started in the second half of last year. The three largest economies – the US, Europe, and China – are all demonstrating solid growth. For the first time since the Global Financial Crisis, there appears to be a major upswing of growth among the world’s major economies.  Improving growth combined with the continuation of reasonably accommodative fiscal policies, have kept risk assets like equities aloft, even as interest rates rise.

Beyond the US market, the MSCI EAFE Index of developed international stocks was up 6.5% during the quarter, while the MSCI Emerging Markets Index soared more than 11%.

Market Outlook

Looking forward, there remains plenty of uncertainty on the horizon, but the underpinnings for economic growth appear to be in place. And despite record market highs, there appears to be enough investor skepticism to suggest the market can still go higher.

According to the AAII, bullish sentiment, expectations that stock prices will rise over the next 6 months, rose 4.1% to 35.3%.  The historical average is 38.5%. So even though the market is at near record highs, investor sentiment is less bullish than the historical average.  That collective skepticism is a good thing.

Yet another good thing is that the market is no longer really a Trump rally, especially given rising uncertainty about Congress’ ability to further his pro-business agenda. The market is now trading on fundamentals such as economic growth, both at home and abroad.  So while President Trump may still give his permission to call this the “Trump Rally,” recent market moves suggest that there is more to this rally than just Trump.

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