Stocks rallied in the first quarter largely on the expectation that President Trump would be successful in moving forward with his promise of jobs, lower taxes and decreased regulation. That optimism was reduced somewhat after the Republican’s ill-fated attempt to repeal and replace the Affordable Care Act, but then rejuvenated again after a recent promise to significantly reduce the corporate tax rate.
Who knows what promises will be made and broken (and made again) over the coming months, but this administration is definitely keeping investors on their toes.
The S&P 500 Index rose in January and February, but then stalled out in March. The index closed the quarter up 6.1%. International stocks also performed well, with the MSCI EAFE benchmark up 7.2%.
Through March 31, the best performing sector of the U.S. economy was technology (+10%). On the opposite end of the spectrum, energy stocks fell 6%, as previous expectations for a summer rally in oil prices oil prices have diminished.
Bond prices traded in a relatively narrow range during the quarter. On March 31, the average bond was trading at almost the exact same price as on December 31. Currently, the yield on the 10-year Treasury is 2.3%.
Real gross domestic product (GDP) increased at an annual rate of 3.5% during the third quarter and 2.1% during the fourth quarter of 2016. This is decent (not great) growth which has allowed the Fed to continue moving slowly (yet deliberately) with respect to raising rates. The Fed Funds target range is now 0.75% – 1.00%. A recent poll of economists shows that most still believe there will be two more hikes this year of 0.25% each.
Last month, the bull market turned eight years old. This may cause you to wonder, “How long can the good times last?” Historically, one thing that nearly all corrections have had in common is that they were generally preceded by a brief period of above-average volatility. Over the last several months, financial markets have been exhibiting below-average volatility. This, despite an unexpected change in political power and a rather tumultuous “first 100 days”.
As a good Lutheran might ask, “What does this mean?” First, it is a reminder that no matter how smart the analysts, economists, and fund managers may sound when they make their forecasts, their odds of being right about the future are just about as good as yours or mine. Second, know that risk is always present (perhaps even more so than usual) when people act as if there is no risk. Sound familiar? Lastly, staying invested and remaining diversified is still the most reliable way to capture a fair and reasonable return over time.
First Quarter 2017 – Performance Summary: