1st Quarter 2017
The first quarter of 2017 saw the stock market rise but there was a reversal in the pattern of the prior two quarters. Large cap stocks outperformed smaller cap names: the Russell 1000 was up 6.0%, while the Russell Mid Cap rose 5.2% and the Russell 2000 2.5%. Some of the “Trump Bump” began to fade: for instance, high tax rate stocks sold off as the prospects for tax reform receded.
GDP growth ended the year on a weak note with a 1.6% gain for 2016. Going forward we expect 2017 GDP to be 2% at best. On the positive side, employment is strong and corporate earnings will show their first meaningful gains in a while. Inflation is likely to stay muted, despite heightened expectations, partly due to modest economic growth and declining energy prices and partly due to still low capacity utilization rates. The Federal Reserve raised rates again and may raise them twice more this year.
The new Administration came in with high hopes for health care, tax reform, regulatory rollback and infrastructure spending. The setbacks in Congress are good news/bad news: the good news being that the checks and balances outlined in the Constitution are working; the bad news is that the defeat on health care repeal may inhibit tax reform and an infrastructure program.
The stock market P/E still looks high by historical standards, but the rise in earnings will help the market grow into that valuation. We believe that equities still look attractive relative to other asset classes such as fixed income, and that US stocks remain attractive compared to other markets. As a result, we expect US stocks to continue to rise modestly.
There are still geo-political risks. The actions of North Korea are worrisome, as are continued terrorist acts around the globe. Dysfunction in the US government may also temper optimism and stymie the market’s advance.