Whatever one’s political leanings and views on President Trump and his administration, there is little doubt that his election has generated a great deal of optimism about the economic outlook. The stock market rally (dubbed the “Trump Rally,” and one the President has repeatedly taken credit for) that has occurred since Election Day has been driven, at least in part, by expectations for accelerated economic growth and improving employment.
General optimism is reflected in the most-recent consumer, business, and investor confidence surveys, which in some cases show the highest levels of confidence since 2000. But, as has been evident in recent weeks, failing to meet these expectations can have serious consequences: Stock investors experienced a sharp drawdown as a result of Congress’ tabling of health care legislation in March.
Somewhat chastened, investors will now be watching carefully as Congress moves on to tackle tax reform and other elements of President Trump’s economic agenda. If the outcome appears as though it will disappoint, stocks could face further vulnerability, due to extended valuations relative to historical norms. Reasons exist to be optimistic about the economic outlook going forward, but the ride may not be smooth, and stock prices may face bouts of volatility that have not been experienced in more than a year.
Equity markets continued their recent trend of strong performance in the first quarter, rallying again to record highs in the midst of robust employment data, clarity on the interest rate front, and a flurry of initiatives in the Trump administration’s first weeks in office. Stock prices gained ground right from the start of January, and didn’t encounter much in the way of headwinds until the middle of March, when Congress shelved legislation to overhaul health care, due to its lack of support. Nevertheless, the March reading of consumer confidence checked in at its highest level since 2000, indicating that the rise in stock prices is supported by a great deal of optimism. Against this backdrop the S&P 500 Index finished the quarter with a gain of +6.1%.
The ten primary economic sectors delivered solid performance during the quarter, with only a couple of notable exceptions. Performance disparity between the extremes was wide, making sector allocations important. As with the prior two quarters, the performance disparity between the best- and worst-performing sectors was significant, amounting to more than 2000 basis points for the three months. Information Technology, Health Care, and Consumer Discretionary were the strongest performers, producing gains of +12.6%, +8.4%, and +8.5%, respectively. The Energy, Telecommunication Services, and Financials sectors were the poorest relative performers, posting returns of -6.7%, -4.0%, and +2.5%, respectively.
The Russell 1000 Index of large capitalization stocks generated a +6.0% total return, bringing its one-year advance to +17.4%. Within the large cap segment, growth stocks outperformed value stocks. Small cap stocks, as represented by the Russell 2000 Index, underperformed large caps for the first time in several quarters, and finished with a total return of +2.5%. Small cap growth outperformed small cap value by more than 500 basis points. The Nasdaq Composite, dominated by information technology stocks, finished with a gain of +10.1%, and is now up +22.9% over the past year. The Dow Jones Industrial Average of 30 large industrial companies gained +5.2%.
Real Estate Investment Trusts (REITs) declined again during the quarter, with the DJ US Select REIT Index posting a loss of -0.3%. Commodities also generated losses, with the Bloomberg Commodity Index sliding -2.3%.
International stocks produced much more robust performance than US equities overall, at least temporarily reversing a prominent trend that has been in place for several years. Global investor confidence seems to be on the rise following the 2016 US election, European economic growth has stabilized, and many economists believe 2017 will bring more of the same. Within this context, international stock indices were mostly higher. The MSCI ACWI ex-USA Index, which measures performance of world markets outside the US, gained +7.9%. The MSCI EAFE Index of developed markets stocks rose by +7.3%, and is now up +11.7% over the past 12 months. Regional performance was, on balance, positive. The Asia region was the strongest performer on a relative basis, with the MSCI EM Asia index posting a return of +13.4%. Eastern Europe and Japan were the poorest relative performers, with gains of +0.1% and +4.5%, respectively. Emerging markets performance was robust, as the MSCI Emerging Markets Index surged +11.5%, and is now up +17.2% on a year-over-year basis.