Quarterly Commentary – March 2017

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The U.S. Equity markets continued their upward move during the first quarter of 2017, peaking by the end of February before stalling and turning lower in March and bouncing around during the past few weeks. The following are performance numbers from various popular indexes for the quarter. Index numbers are not individually comparable to a properly diversified portfolio. Each portfolio may include an allocation to securities similar to these indexes in varying amounts based on your personal risk tolerance and should only be compared in that context. The S&P 500 was up 6.07% for 2017. The Dow Jones Industrial Average was up 5.19%. The Nasdaq Composite Index was up 9.82%. The Russell 2000 Index was up 2.47%. International equities as represented by the MSCI World Ex U.S. Index were up 6.81%. Fixed Income as represented by the Barclays Aggregate Bond Index ended up 0.82% for the year.

There was a fairly wide range of returns within the U.S. equity markets among various exposures such as sectors, company size and value vs growth styles. This past quarter exposure to international equities paid off, however smaller U.S. company stocks along with value oriented stocks held things back somewhat after a nice run last year. Fixed income produced a very small gain as this allocation’s fit into a portfolio in the current environment is more about creating a buffer to soften portfolio volatility as interest rates normalize back to higher levels.

Despite the surge in optimism, some of the possible concerns of late from the viewpoint of equity investors include the GOP’s health care setback which could indicate that the much-anticipated tax reform may face similar challenges. Worries about the administration’s ability to execute on its pro-growth policy agenda may become a concern, particularly given the factions in the house of representatives and the thin GOP majority in the Senate. Despite much talk about infrastructure spending, specific plans have yet to be put forward and this spending may be less comprehensive than the market anticipated. The question is essentially whether expectations for political optimism may have been overdone. On the other hand, there are times when some political gridlock can be a good thing for the markets since too much change too quickly can create disruptions faster than consequences can be assimilated. Most changes tend to create winners and losers. Lack of predictability and transparency can elevate risks. It boils down to a balancing act.

Nonetheless, there are reasons to remain upbeat about the U.S. economy. The data remains solid on the labor market, manufacturing, housing, consumer spending and business investments pointing to the economy remaining on a growth track. Last quarter GDP was revised higher to 2.1% driven by a sharp upward revision to consumer spending which rose 3.5% in the past quarter. As was anticipated, the Fed increased the funds rate by 0.25%, noting the continued expansion in economic activity with inflation approaching the 2% target and affirming a gradual path of normalization moving forward which presents a good scenario for the markets. The most recent consumer confidence reading reflected a level not seen since the year 2000 with a reading of 125.6 which was more than 10 points higher than consensus. Confidence can play a very important factor in future outcomes. It can at least provide some buffer against overreactions from investors on negative news as was the case during 2016.

Looking forward near term, could U.S. equities have gotten ahead of themselves and pause or correct at these levels, that is certainly possible. Riding the course is still the best approach and owning a properly diversified portfolio will certainly play a key role in the process of managing risk.

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