As we entered 2017, equity markets continued the upward trend that began after our presidential election. Investors have been optimistic that President Trump and the Republican Congress will pass legislation that would lower taxes and reduce regulation. This optimism continued unabated until March, when the first signs of trouble arose in getting a pro-business agenda approved.
When President Trump realized that he did not have enough Congressional support to pass his Affordable Health Care Act replacement, he pulled the bill. To many investors this cast doubt on his ability to move forward with his agenda. As a result, stocks declined through the month of March, but not enough to keep equities from netting a solid return for the quarter with the S&P 500 gaining 6.1%. Small cap stocks, which were the darlings last year, trailed large caps and ended growing 2.5%. International stocks, which lagged last year, kept pace with the S&P. As anticipated, British Prime Minister May invoked Article 50 of the Lisbon Treaty on March 29th to formally begin withdrawal from the European Union (EU), but this was taken in stride by investors.
Also in March, the Fed raised interest rates another 25 basis points, but this too was largely anticipated. The 10-year Treasury, which ended 2016 yielding 2.45%, ended the quarter yielding 2.39%. Overall, bond returns were slightly positive. As a result of all the activity in March, volatility increased, but remained well below historic norms.
Oil prices drifted lower for most of the quarter as production came above the agreed upon OPEC cuts. However, this trend reversed at the end of March and oil moved closer to $50 a barrel as gas inventories surprised on light side. With all the discussion of increased infrastructure spending, it is no surprise that global infrastructure posted another solid quarter of growth. Overall, real return strategies provided similar returns as stocks, while absolute return strategies provided returns which fell somewhere between the returns of stocks and bonds.
Generally, equity markets price in earning expectations and expectations have increased on optimism that Trump’s business-friendly policies will stimulate further growth. However, as seen in the first quarter’s economic data, current spending and business investment has not kept pace with this rally. At some point, the market will need to see additional growth to support this bump. If Congress continues to be unable to pass legislation on which this rally has been built, volatility and price adjustments could occur. Let’s hope this does not happen and Congress does not disappoint.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Rick Cloutier, PhD, CFA is the Chief Investment Strategist for Washington Trust Bank with over 25 years of portfolio management and investment experience. He is responsible for directing the portfolio management, research, and trading activities for the bank’s multi-asset class strategies. He is also responsible for overseeing the client portfolio manager team and portfolio analytics team. Rick has written numerous articles for Investopedia and wrote a weekly column for the Fall River Herald News in Massachusetts. His research has appeared in numerous journals, including the Journal of Investment Management and Financial Innovations, the Journal of Business Management and Economics, and the International Journal of Revenue Management. He provided a nightly commentary on WALE radio and authored the novel Caveat Emptor. Rick earned his BS from URI, MBA from Boston University and PhD from SMC University.