Today we will discuss a brief overview of the market performance in the first quarter, and I will “nerd out a bit” on the current divergence we are seeing between the “hard” and “soft” data. I will explain…stay with me!
Stocks had a strong start to 2017! The S&P500 posted an impressive 6.1% total return during Q1, the 6th consecutive quarterly increase. The gains, which were mainly concentrated in January and February with March essentially flat, were driven by a combination of an improving economic backdrop and optimism surrounding pro-growth policies out of Washington. The pause in March was mainly due to the failure of the ACA replacement to go through Congress, and that is making the markets reconsider the scope and timing of the Trump agenda.
International and emerging markets stocks outperformed the U.S. based on the MSCI indices and the S&P500.
As you know, the Federal Reserve (the Fed) increased short-term interest rates in March, however long-term rates ended up declining over the quarter – this is known as a flattening of the yield curve. This is a reminder that the Fed only controls short-term rates – the market controls long-term rates.
So, I am going to nerd out for a minute on this divergence we are seeing between “hard” and “soft” data. And let me start with what is “hard” and what is “soft” data. In short, “hard” data reveals actual levels of economic activity – think employment, durable goods orders, housing starts, etc. “Soft” data refers to how people feel about the direction of the economy. Consumer sentiment readings, for example, are currently near multi-year highs. Small business owners are also feeling optimistic, according to surveys. So what’s the problem? It sounds good, right? The problem is that while the soft data is strong, we have not seen the hard data match the improving sentiment…yet…maybe.
At this point, the big question is will the improving sentiment indicators translate into an actual improvement in data, and the short answer is we don’t know yet, and we won’t know until after we see what the Trump administration actually gets passed.
Thank you for taking the time to read this, and as always, if you have any questions, please feel free to reach out.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. All indicies are unmanaged and may not be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.
Investing involves risk including loss of principal.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Barclays Capital Aggregate Bond Index, which used to be called the "Lehman Aggregate Bond Index," is a broad base index, maintained by Barclays Capital, which took over the index business of the now defunct Lehman Brothers, and is often used to represent investment grade bonds being traded in United States.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia.
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.
The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.