April 6, 2017
First Quarter Market Review
The first quarter of 2017 marked the eighth anniversary of what is, thus far, the second longest running bull market in US history. Stocks generally have recorded solid gains in the first quarter of the year; however, returns varied widely among the major indices. Smaller-cap indexes, having outperformed nearly every other asset class by a wide margin in 2016, have taken a backseat so far in 2017 to the broad large-cap Standard & Poor’s 500 Index and various international indices.
Additionally, 1Q 2017 was one of the least volatile quarters on record, with the S&P 500 trading for over 109 days without a daily decline of 1% or more. This exceptionally low volatility did not end until March 21st, and has left many investors wondering whether the stock market has come too far too fast. This recent market consolidation at quarter end brought the broader S&P 500 index down only 2%, yet under the surface, it appears that a larger correction occurred in some individual names. According to Strategas Research Group, 24% of the S&P 500 has already experienced a correction of 10-20% from their 52-week highs, with another 14% declining more than 20%! We believe this could potentially set the stage for the next move higher given a “stealth correction” has already occurred.
As the current economic expansion nears its eighth birthday, it is important to note that the average business cycle lasts five years and the longest cycle in history lasted 10. So how long can this current economic cycle last? We think there is no reason it cannot persist if the key economic numbers continue to strengthen. Corporate profits have improved, retail sales have risen, and the labor market remains strong. Additionally, various consumer and business surveys suggest growing optimism. Even the Fed is showing confidence in the economy through its open market policy actions. In a major vote of assurance, the Fed raised the Fed Funds rate at its March meeting. The Fed’s move came earlier than markets had been expecting, yet markets took the hike in stride. The prospects for two other sources of market optimism—potential tax cuts and a rise in fiscal spending—could still get tangled up in political wrangling in Washington, but for now, we have to wait and see.
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