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March 2017 Market Commentary

Saturday, Apr 1, 2017

The “Trump Trade” in U.S. equity markets began to slow in March, but its early year strength let investors enjoy strong first quarter returns. Global equity markets continued their 2017 rally, driven by expectations of improving global growth and rising corporate earnings. In fixed income, the Bloomberg Barclays U.S. Aggregate Bond Index was flat for the month despite the Fed’s decision to raise its policy rate for the second time in four months. The following table contains a summary of March’s market performance:

Index March YTD Index March YTD
S&P 500 (Total Return) +0.12% +6.07% All Country World Index (Net) +1.22% +6.91%
MSCI EAFE (Net) +2.75% +7.25% Barclays Aggregate -0.05% +0.82%
MSCI Emerging Markets (Net) +2.52% +11.45% 60/40 Blend* +0.71% +4.44%
* 60% All Country World Index/40% Barclays Aggregate

While U.S. investors’ optimism over the benefits of potential reform has waned, global optimism for equities remains strong, as investors turn their attention to strengthening evidence of global economic recovery and earnings growth. In the fall of 2016, investors were expecting slow economic growth in the U.S. and uncertain about when Europe, China and the emerging market economies might begin to show faster growth. Today, the global economy appears to be growing in sync as “economic surprise” indexes, which measure whether economic data was weaker or stronger than forecast, are surprising to the upside not only in the U.S., but in Europe, Japan, China and the emerging markets.

The U.S. economy produced some of its strongest job growth since 2008, adding nearly 300,000 jobs with the unemployment rate falling to 4.7%. The number of job openings is near a post-crisis high and an increase in the number of workers willing to voluntarily leave their jobs for new ones both point to faster wage growth, supporting increased consumer confidence. The index of leading economic indicators also increased for the sixth straight month and is now at its highest level in a decade, with gains across most the indexes’ indicators, suggesting “an improving economic outlook for 2017.”

The Fed’s second rate increase in four months, which was nearly universally expected, was almost a non-event, with equity markets finishing higher on the day. The market’s response reflects in part a belief that the Fed’s policy decisions will remain accommodative to growth. The Fed’s accommodative signal is based on the observation that while there are signs that inflation is increasing, long-term interest rates remain low, a reflection of the market’s view of inflation and growth. Low long-term interest rates have led to near record corporate bond issuance in the first quarter of 2017. The yield spread investors demand to hold investment-grade corporate bonds over Treasuries fell to 1.16%, from 1.22% at the start of the year.

In the European Union, approximately three million jobs were created over the last year, more than in the U.S. Eurozone factory growth accelerated in March, as an improving global economy boosted export demand in the region's biggest economies. Measures of manufacturing output for Germany, France and Italy all rose compared with the previous month, pushing a European-wide measure to its highest since 2011, Underlying inflation is nearing 2%, allowing conversations to take place as to when the ECB will begin to raise interest rates and end quantitative easing. Concerns about the EU’s existence in the face of upcoming elections appear to have decreased, as evidenced by positive capital inflows to European equities.

In Japan, quantitative easing has reduced the value of the yen enough that export growth is fueling the nation’s overall economic growth. Emerging market nations have displayed signs of accelerating growth. As a group, they have benefitted from the recovery of Chinese growth, the stabilization of commodity prices, improving domestic demand, and a depreciating dollar.

While synchronized growth across the major economies is a positive sign, investors should remain aware of several threats to growth and asset prices. China continues to support its growth with high levels of debt believed by many to be unsustainable. European unity is still under threat from populist movements as well as a troubled Italian banking system. And in the U.S., where business and consumer confidence have risen in anticipation of tax and regulatory reform, further disappointments from the Trump administration could lead to a further unwinding of the “Trump Trade.”

CAPROCK continues to remain constructive on the outlook for economic growth and equity prices. However, we also believe markets are expensively priced, and have historically experienced sell-offs in years in which the market finishes up. Depending on the cause of such sell-offs, we believe such events would provide an entry point for those wanting to increase their allocation to public market equities.

This communication is not an offer or solicitation with respect to the purchase or sale of any security and is for informational purposes only. Information contained herein has been derived from sources believed to be reliable, but CAPROCK makes no representations as to its accuracy or completeness. Investment in securities involves the risk of loss. Past performance is no guarantee of future returns.








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