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First Quarter 2017
2017 got off to a strong start during the first quarter, continuing the momentum sparked by the election results last year. At the end of the first quarter, returns for stocks of large domestic and international companies accelerated the growth experienced in the fourth quarter of 2016. In addition, bonds partially recovered losses incurred since November as interest rates eased their climb higher.
Financial market participants continue to closely monitor the situation in Washington for successful progress on anticipated policy prescriptions aimed at improving growth. Indeed, the sharp post-election increase in equity valuations is largely ascribed to the anticipated impact of the new Administration’s tax changes, infrastructure spending and regulatory reduction agenda. With policy making getting off to a shaky start this year, markets paused to evaluate the likelihood of successful negotiations in Washington. The geopolitical issues heating up in the Middle East, and the Korean Peninsula will make happenings in Washington the primary focus of financial markets.
Domestic policy activity – After the new Administration faced challenges moving their healthcare bill through congress, markets have become more skeptical about the implementation of other policies. Among those at the top of financial market’s wish list are corporate tax policy, both in terms of tax rates and arrangements to repatriate cash held abroad, along with easing of federal regulation. These policy and regulatory shifts have the potential to accelerate domestic growth and improve/sustain equity valuations. In the longer-term, proposed infrastructure investment plans also have the potential to bolster economic activity, and, rightly, expectations are that their proposals will have a much longer timeline and impact.
Central Bank activity, rates and inflation – For the second time in three months, the Federal Reserve increased its benchmark interest rate a quarter point, amid rising confidence that the economy is poised for more robust growth. The move, widely anticipated by financial markets, takes the overnight funds rate to a target range of 0.75 percent to 1 percent and sets the Fed on a likely path of regular hikes ahead. The normalization of interest rates will be a critical component of financial market activity this year, as the Fed will need to balance its policy with what appears to be a much more stimulative fiscal policy stance.
Corporate Earnings – After hitting a soft patch in 2016, largely driven by the slump in crude oil prices, domestic corporate earnings are set to reestablish a healthy growth pace this year. As we enter the second quarter, a renewed focus is on earnings reports and confirmation that expansion is back on track.
Geopolitical concerns – Clearly, since the election, markets have been positive regarding election results and anticipated policy changes. In the shadow of this optimism lies a sense of concern that some unpredictable policy blunder could cause systemic problems. These concerns are primarily focused on foreign and trade policy where relationships are complicated, delicate and sometimes tenuous. Investors should remain vigilant of these developments that could derail other economically positive policies.
As always, we remind investors that during these times of uncertainty it is paramount to remain focused on long-term objectives. Maintaining a disciplined approach during spates of volatility opens investors to opportunities, and perhaps, more importantly, prevents costly mistakes.