First Quarter Market Review
The first quarter of the year continued the momentum the equity markets experienced toward the end of 2016 following the presidential election. The continued worldwide recovery in industrial activity, trade, and commodity industries bolstered the most synchronized global expansion in the past several years, overshadowing political uncertainty in the U.S. and Europe. As domestic and foreign stock markets climbed higher, volatility remained unusually subdued in the face of many uncertainties. In fact, since October 11, 2016 the S&P 500 went 109 trading days without the index declining over 1%. To help put this into perspective; in the first quarter of 2016 the S&P 500 had 14 different occurrences where the index declined over 1%.
While the equity markets continued to march higher, there were some changes in leadership from last year. U.S. equities have outperformed International markets for an extended period of time and some believed that would continue as the current administration has many domestic priorities that could affect trade, currencies and globalization. In Q1 both developed and emerging foreign markets delivered market-leading returns. Changes in leadership were also seen in market capitalization (large outperformed small), style (growth outperformed value), and sector (healthcare and technology outperformed while financials and energy lagged).
While equities continued to set new highs, fixed income returns were much more muted in the quarter. The Fed raised rates in March, yet longer-term Treasury yields have actually fallen slightly since then. Recall that the 10-Year Treasury Bond was yielding 1.8% just prior to the election and moved to a high point of 2.6% in mid-March before settling at 2.4% at quarter-end. This significant move upward in rates negatively affected the price of most bonds over this short period of time. All things considered, the first quarter was a welcome reprieve from the negative return environment experienced in the prior quarter. And fixed income investments could prove valuable in smoothing a portfolio’s performance should more normal levels of volatility return to the equity markets.
After years of monetary stimulus, the world’s major economies are starting to see firmer growth and inflation, and policymakers are slowly changing course. The Federal Reserve has increased rates three times since the economic recovery began, and looks positioned for two more hikes this year and up to three next year. In Europe, the European Central Bank (ECB) is trimming monthly asset purchases and inching away from ultra-accommodative policy, but the process of interest rate normalization is expected to be slow and take several years.