Monthly Markets Memo - March 2017
by Dan Zalipski & Scott Rosenquist, CFA
The post-election rally may be over for now. Over the past month, the major U.S. Indices are mixed. Large companies represented by the S&P 500 Index are up a little over 1%. At the same time, mid and smaller sized companies, represented by the S&P 400 and Russell 2000 respectively, were slightly negative over the past month.
International developed markets, as measured by the MSCI EAFE Index, are slightly ahead of their U.S. counterparts over the past month. Emerging Markets (MSCI Emerging Markets Index) are leading the pack with a return just shy of 3% over the past month. Commodities have come under pressure; oil prices declined as supply remains high. Finally, nearly every fixed income market we track was negative over the past month as the Fed prepared investors for the March 15th interest rate increase.
Populism is getting some attention these days. Often heard in the political arena, it represents the notion that the ‘common man’ is being exploited by the ‘privileged elite’. Investors quickly became aware of it after the surprising outcomes of last year’s British referendum (Brexit) and the U.S. Presidential Election, both of which saw their respective winning campaigns embrace a populist friendly tone. Hoping to capitalize on that momentum, populist leaning parties are making a push in numerous European elections this year. Regardless of how one may feel about the subject as a voter, an investor needs to recognize that the political movements embracing populism have the potential to be a disruptive force in the markets.
A primary concern about populist movements in Europe is their threat to the stability of the European Union. The Dutch went to the polls last week, with the populist anti-EU party coming in a distant second. The results of the Dutch election brought some relief to Europe, but it may be temporary. The French election is rapidly approaching, with the first round of voting scheduled for April 23rd. The Front National, France’s anti-EU populist-leaning party, is represented in the upcoming election by Marine Le Pen, who is heavily favored in their first round of voting. Polls currently show Le Pen being defeated in the second round, but the events of 2016 showed investors that polls can be wrong.
Investors here in the U.S. may be wondering why the need to pay attention to European politics. Simply put, we live in a global world, and a well-constructed investment portfolio should reflect that through both domestic and international exposure. Roughly 15% of the S&P 500’s revenue is generated in Europe and the European Union is the U.S.’s 2nd largest trading partner in both imports and exports. It is important to monitor these elections and the potential impacts they may have on their respective economies and other markets through changing trade agreements and economic policy.
The Federal Reserve raised the federal funds rate by .25% last week as widely anticipated in the financial markets. Perhaps more importantly, Fed official’s rate forecasts showed little change with potentially two additional increases this year. This was viewed somewhat positively by the market as the Fed signaled they may allow inflation to move higher before raising rates more aggressively. Yields could stay lower for longer which reinforces our preference for higher yielding securities in the fixed income markets.
While the economy shows signs of optimism through various measures of business and consumer sentiment indicators, first quarter GDP growth projections from the Atlanta Federal Reserve looks to be muted. The uncertainty surrounding various policies in Washington could impact the optimism currently held by corporations and consumers. Market valuations in the U.S. for both equity and fixed income markets appear elevated compared to historical levels as we continue to look for attractive investments across the markets with a global view.
“An investment in knowledge pays the best interest.”
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Although general strategies and / or opinions are revealed, this post is not intended to nor does it represent or reflect transactions or activity specific to any one account. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All data and information is gathered from sources believed to be reliable and is not warranted to be correct, complete or accurate. Investments carry risk of loss including loss of principal. Past performance is never a guarantee of future results.