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Market Commentary

April 2017 Market Commentary – Go-Go the Mo-Mo as the Global Growth Story Continues

Data Source: Bloomberg

Highlights:

• Global equities were positive for the month led by Europe as anxiety over the outcome of the 1^st round of the French election dissipated with the establishment candidate, Emmanuel Macron, projected to prevail over the populist candidate, Marine Le-Pen., in the follow up second round of elections to be held on May 7. 
• Emerging markets also outperformed most other regions despite geopolitical issues surrounding North Korea, Turkey, and South Africa, as well as the continued weakness in Russian equities.  Investors have become more comfortable with the global growth story, led by China.    
• U.S. equity markets continue to be influenced by D.C. headline news with U.S. stocks having rallied over signs pointing towards a greater push for tax reform. Both the French electoral outcome and the release of a Trump tax proposal helped push U.S. equities into positive territory during the final week of the month. 
• Despite lagging the rest of the world, U.S. equities (S&P 500) turned in a respectable 1.0% return while small caps (S&P 600) slightly underperformed for the month.  Growth stocks, led by technology and consumer discretionary, outperformed value stocks, which were dragged down by the energy sector. 
• U.S. large cap technology is dominating all other S&P sectors with a 15.4% YTD return while energy and telecom are down for the year (-9.4% and -7.1%, respectively).  The latter two sectors have negatively impacted value and yield-driven strategies while the former has propelled growth and momentum strategies. 
• Headline 1Q17 GDP growth of 0.7% (SAAR) appears disappointing on the surface but masks underlying strengths outside of consumer spending such as residential and non-residential fixed investment as well as net exports helped by improving global growth.  Future quarters should benefit from inventory replenishment to catch up with final sales and a rebound in public spending.  Finally, April employment tax withholdings grew 13.6% from the prior year, further demonstrating the strength of the U.S. jobs market.  
• The bond market has been less sanguine on the global growth outlook with much of the rate rise following the November elections largely wiped out.  After peaking near 2.6% in early March, the 10-Year U.S. Treasury Yield fell all the way to 2.17% before recovering to 2.28% following the French elections. 
• Details of the Trump tax plan are sparse, but there are some proposals with investment implications including the elimination of the 3.8% surtax on investment income for upper-income investors as well as the alternative minimum tax and estate taxes.  Small businesses structured as S-corporations or limited liability companies/partnerships would also enjoy a 15% tax on pass-through income, down from a top individual rate of 39.6%. 
• Bears continue to build a wall of worry around D.C., trade protectionism, the fallout from Brexit, North Korea, etc., but the markets are advancing on the back of earnings and revenue growth brought on by global reflation.  S&P earnings growth looks robust as analysts are expecting 9.7% earnings growth for all of 2017 on top of 5.3% revenue growth. 

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