Time for a Quarterly Review

Week / Month / Quarter in Review

First quarter 2017 is in the books. The final week was very positive for small cap stocks (measured by the Russell 2000), The index was up 2.4% for the week. You may recall that the post-election rally was fueled by small company stocks, but momentum had waned–that is, until last week.  The Russell 2000 gained only 0.1% for the month and has been 2.5% for the entire quarter. Without last week, the story would have been dramatically different. The large U.S. stock market (as defined by the S&P 500) lost 0.23% on Friday, was up 0.80% for the week, and gained 5.5% for the quarter. Nevertheless it still remains 1.39% below the record close set on January 6, 2017.  This leads some to wonder if the Trump rally is a bit over-extended.   Longer term U.S. Treasury Bonds (as measured by the 20+ year ETF) lost 0.7% for the month but remains up 1.74% for the quarter. REITs (measured by the Wilshire REIT Index) lost 3.3% for the month.  The moral of this story is that the markets are a mixed-bag at the moment.

One thing that is not confused is investor confidence. The University of Michigan studies the level of confidence in its sentiment survey.  They ask respondents to give their opinion about the probability that the stock market will increase over the next year.  In the latest survey, a near-record 11% of the respondents answered that there is a 100% chance of an increase in the stock market in the next year.  These folks believe that there is a 0% chance that it will be lower than it is now. Based on this survey, investor sentiment is at an extreme reading. Bear in mind that this sentiment reading, like most, is a contrary indicator. In other words, the market usually goes in the opposite direction to the consensus belief.

On a different stage, U.S. real GDP growth was revised upward for the 4th quarter 2016 to an annual rate of 2.1% according to the third estimate released by the Bureau of  Economic Analysis. While an increase over earlier posts, it is hardly something to get excited about.  In the third quarter of 2016, real GDP increased 3.5%.

Looking ahead

This will be a fairly light week for economic data. Focus will likely be on Wednesday’s release of the Fed’s Open Market Committee (FOMC) minutes from its March meeting. Pundits and analysts alike look to the minutes for nuances to the press conference that was held by Ms. Yellen immediately after the meeting. Employment data for March will be released Friday.

The post-election rally is riding on the expectation that the Trump administration can deliver on lower taxes and less regulation. See earlier post on Trumponomics. While the successful rollback of some regulation by executive order has certainly added fuel to that fire, the failure to pass modification to the Affordable Care Act has many wondering if tax reform can actually get passed. It has been more than three decades since major tax reform. There are many reasons why it is difficult. The ACA setback could put a damper on the narrative of deal-making by the administration and paints a risk to markets that are arguably already overbought and expensive.

If, like me, you enjoy but maintain a healthy skepticism of statistics, you will have to like this. Georgetown University’s Sahlil Mehta is a statistician with an impressive resume. In a recent blog post he analyzed and reported on the probability of stock market drops of various amounts between now and year end (a nine month period).  He concluded that there is a 71% chance that (before year-end) we will see at least 1 correction that is 5% or worse. (Remember that the S&P has grown by 5.5% this year so far.) Of course, that also means that there is a 29% chance that we won’t get such a correction. Further, he has concluded that there is a 32% chance that we will see at least one correction before year end that is 14% or worse. Some will see that as a problem, others an opportunity.

A positive for the market is the continued infusion of capital by the European Central Bank (ECB). Money is flowing from the ECB into the markets in the effort to stimulate the economy.  There is still much uncertainty about whether and when this will stop. This is something to keep an eye on.

Attention will soon turn to the 1st quarter earnings season. Meanwhile, I hope that you are enjoying Spring.

I am still planning to alternate articles posted here between investment updates and relevant financial planning topics. If you like this sort of thing, I would be grateful if you would share it with your friends. Also, let me know what topics are important to you.