A Strong Start to 2017, but Leadership Shifts

The first quarter of 2017 marked the eighth anniversary of what is now the second-longest running bull market in U.S. history. Overall, equities posted solid gains during the quarter—but not all areas of the market moved in unison. In contrast to 2016, when small-cap stocks significantly outperformed, early 2017 has seen large-cap names—particularly those in the S&P 500—and international markets take the lead.

This rotation in leadership reflects a broader shift in investor sentiment and expectations, especially as valuations rise and global economic momentum builds. Small-cap stocks, which surged last year, have taken a breather, giving way to their larger-cap counterparts as the primary growth drivers.

Stealth Corrections Amid Low Volatility

One of the more surprising elements of 1Q 2017 was its exceptionally low volatility. The S&P 500 went over 109 consecutive days without a single-day drop of 1% or more—one of the calmest stretches on record. That tranquility ended on March 21st, prompting renewed questions from investors: Has the market come too far, too fast?

Despite the minor 2% dip in the broader S&P 500 at quarter-end, a closer look reveals a more significant correction beneath the surface. According to Strategas Research Group, nearly 24% of the S&P 500 had already experienced price declines of 10–20% from their 52-week highs, and another 14% dropped more than 20%. This kind of “stealth correction” within individual stocks, while not always obvious at the index level, may have helped reset valuations and set the stage for the next move higher.

Economic Expansion: How Much Longer Can It Last?

As this economic expansion approaches its eighth year, many are asking the inevitable question: how much longer can it continue? Historically, the average business cycle lasts about five years, with the longest running 10. But cycles don’t die of old age—they end due to economic imbalances or shocks. And for now, the fundamentals look encouraging.

Corporate earnings are on the rise, consumer spending is healthy, and the labor market continues to show strength. Surveys point to growing optimism among both consumers and business owners. Even the Federal Reserve is signaling confidence: it raised the Fed Funds rate during its March meeting—a move that came earlier than anticipated yet was well received by markets. While political uncertainty around potential tax reform and fiscal stimulus looms, the underlying economic picture remains positive.

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