1st Quarter 2017 Market Review: The beat goes on

There was no shortage of political intrigue in the first quarter of 2017 as the Trump administration assumed the reins of power with a mandate to upset the status quo. Irrespective of your political views, most people would agree that he has achieved success on that score. Relying on a set of pro-business promises that included lower corporate and personal tax rates, rollback of government regulations, and more favorable trade deals with other countries, financial markets extended the rally in the first quarter that began soon after the election last November.

For the first time in a while, however, international and emerging market stocks decisively outperformed the US market. The S&P 500 rose 6.07% in the first quarter, while the MSCI EAFE Index of developed market equities (mostly Europe and Japan) rose 7.25% and the MSCI Emerging Markets Index jumped 11.44%. European stocks were boosted by some marginally better economic data and the affirmation of the European Central Bank (ECB)’s intention to continue its monetary stimulus for the foreseeable future. Japan was essentially flat for the quarter. Emerging market equities continued the strong performance that began last year, aided by recent weakness in the US dollar. The weaker dollar reduces the pressure on foreign corporations, whose liabilities are often denominated in dollars.

After a sharp run-up in US interest rates in the fourth quarter, fixed income markets stabilized in Q1 17. The 10-year US Treasury note yielded 2.40% at the end of the quarter, not far from the 2.45% at the start, but up sharply from 1.83% the day before the election. As a result, fixed income securities posted positive returns in the quarter, led by longer duration and lower quality bonds. Municipal bonds rallied after a disappointing 2016.

In the real assets arena, US real estate investment trusts (REITs) posted a gain of 0.68% (MSCI US REIT Index.) in the quarter, while non-US REITs rose 3.45%, helped by the weaker dollar. Despite a modest decline in oil prices, energy MLPs posted a small gain of 3.95%.

Chart: 1Q17 Global Equities and Headlines

Outlook and Strategy

Ballentine Partners remains optimistic on the economic outlook for 2017. Continued upticks in manufacturing and services activity, strength in the labor markets, and high levels of consumer and business confidence point to further improvement in economic growth in coming quarters. After several quarters of negative earnings comparisons, US companies recorded an increase in earnings growth in the fourth quarter of 2016 with further increases expected this year. We see no evidence of an impending slowdown in coming quarters that could jeopardize the future of the eight-year bull market in US stocks.

Nonetheless, we are concerned about the ability of the new administration to deliver on its economic promises, and within the time frame that the market seems to expect. The strength in equity prices over the last several quarters has been driven by solid economic data and by the expectation for even faster growth as Trump’s policy ideas are implemented. With the recent failure of the plan to replace the Affordable Care Act, meaningful tax reform is likely to be even harder to achieve. Despite the administration’s disappointment over the failure to pass the bill, equity prices weathered the storm well.

 Chart: Index Returns through March 31, 2017

The Fed has telegraphed its intention for several more interest rate hikes in 2017. Rising interest rates tend to be a headwind for equities, as financing costs increase and bond yields rise, providing more competition for investor dollars. While we don’t expect longer-term interest rates to rise substantially from these levels, we believe the path of least resistance is higher.

As a result of these factors, our Investment Management Committee recently lowered its recommended global equity allocation to neutral.  As long as the economy remains on its current trajectory, we don’t expect a significant correction in stock prices, but we believe that the risk and reward for stocks in 2017 is now more evenly balanced.

Equity valuations in overseas markets remain more attractive than in the US, particularly in emerging markets. Our regional allocation recommendation is to modestly overweight US and emerging market equities and underweight developed international equities. We remain concerned about the longer-term stability of the European Union as the Brexit process gets underway. In addition, stresses appear to be increasing again in other countries such as Italy and Greece. Emerging markets represent good value in our view, especially with a stable US dollar and modestly firming commodity prices.

We recently identified infrastructure as an interesting asset class with reasonable appreciation potential and stable earnings. Infrastructure companies (e.g., railroads, electric utilities, toll roads, communication towers, etc.) earn predictable revenue streams that often have inflation protection built into their contracts and are less sensitive to economic swings than most industries. We are adding infrastructure exposure to client portfolios where appropriate.

Learn more about Bruce D. Simon.


This report is the confidential work product of Ballentine Partners.  Unauthorized distribution of this material is strictly prohibited.

The information in this report is deemed to be reliable but has not been independently verified. Some of the conclusions in this report are intended to be generalizations.  The specific circumstances of an individual’s situation may require advice that is different from that reflected in this report.  Furthermore, the advice reflected in this report is based on our opinion, and our opinion may change as new information becomes available.

Nothing in this presentation should be construed as an offer to sell or a solicitation of an offer to buy any securities. You should read the prospectus or offering memo before making any investment.  You are solely responsible for any decision to invest in a private offering.

The investment recommendations contained in this document may not prove to be profitable, and the actual performance of any investment may not be as favorable as the expectations that are expressed in this document.  There is no guarantee that the past performance of any investment will continue in the future.

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