First Quarter 2017 – “Optimism”
In the first quarter, almost all major markets posted gains; the S&P 500, MSCI EAFE (USD), MSCI EM (USD), and Merrill Lynch High Yield Bond Index appreciated by 6.1%, 7.2%, 11.4%, and 2.7%, respectively. Global markets appeared to be buoyed by an unflappable sense of optimism with regard to future growth; persistent concerns such as the Brexit, political uncertainty, diverging monetary policy, and stagnant growth gave way as investors chose to focus on positive economic fundamentals. In Europe, positive inflation numbers across the region and news that job creation rose to its highest number in ten years indicated to some market participants that the region had turned a corner. China and Japan both saw positive economic data, indicating growth in their manufacturing sectors, while emerging markets benefited from growing exports. Domestically, economic data continued to be positive. However, the dramatic rise in positive sentiment seemed to be outsized relative to these steady improvements and tied to expectations for President Trump’s administration’s ability to create a pro-growth environment through a combination of tax and regulatory reforms. The National Federation of Independent Business’s Index of Small Business Optimism jumped to a record high following the election and has remained at near-record levels. According to recent survey results, actual earnings, capital expenditure plans, and job-creation plans all posted gains in March. However, in recent meetings the FOMC noted there is a discount between ‘hard and soft’ data, as businesses’ positive forward-looking views have yet to effect a significant change in expenditures. Both policy makers and investors face a period of hard work ahead; policy makers have the difficult task of not squandering the favor the markets have afforded them, while investors face the difficult prospect of finding pockets of value in a market where many assets are priced to perfection.