Following several weeks of wobbly economic data, rising geopolitical worries, and intensifying doubts regarding the ultimate fate of pro-growth fiscal agenda set forth by new President Trump, US equities managed to reverse their recent bleeding last week. The S&P500 mustered a gain of +0.8% despite a back-and-forth wobble experience day to day. But more encouraging was that small-size companies and even broader indices such as the Wilshire 5000 fared better perhaps suggesting a return to improved sentiment might be nearing following weeks of deterioration and rising pessimism. At odds however with the more cyclical equities rebound last week has been fresh buying of US treasury securities, often regarded as the safety or risk-off trade when markets are jittery.

From an economic perspective, good news outweighed bad. Corporate sentiment and activity surveys show demand continues at a healthy clip; bank lending is rising and indicates confidence and steady demand; wages look to be accelerating; and gridlock on a significant piece of regulatory reform appears to be thawing (healthcare reform) here in the US is breathing fresh hope into the overall projected success of even bigger policy desires such as comprehensive tax reform later this year. And on a more granular level, anecdotal evidence from a broad swath of US cities both big and small can be viewed as borderline booming. Across the pond, economic data out of the Eurozone including leading indicators, consumer confidence, and auto sales were all quite favorable as well and support the thesis that the continent is finally participating in earnest in the economic expansion after years of muddling. Nominal GDP in China also accelerated to +11.8% over last year; a quite-strong reading no matter how one wants to look at it considering that the country is the 2nd largest contributor to global economic growth.

With economic data remaining supportive, the stalling of US financial markets since the beginning of March and April may be best explained as a needed and overdue breather. Financial markets rarely trend in one direction without pause, nor do they usually move so linearly. There have been more than enough concerns to explain the recent weakness as well. At the same time, recent demand for safe-haven trades like US Treasury securities last week, that normally signify risk aversion and caution may best be chalked up to heightened anxiety over the fate of the Euro amid the French elections over the weekend in which it has been feared another populist anti-establishment (and in this case anti-EU/anti-Euro) candidate was running close in the polls. To the relief of many, it appears that populism may be ebbing, which is being credited with global financial markets moving sharply higher as we write today. All this aside, recent weakness has been relatively tame, and while investor sentiment has deteriorated quite a bit perhaps signaling a return to more favorable trends might be near, we are also mindful of the calendar which historically is less accommodative. Bottom line though: we are not advocates of market timing (as the sharp reversal late-week last week and today perhaps may illustrate), especially when the longer-term trend is believed to remain firmly in place and supported by sound economic data. We still believe the economic cycle gives the up-trend the benefit of doubt.

Following their all-time high on March 3, US equities continue to drift lower in recent weeks on the perspective that hard economic data is still not yet fully confirming the improvement in soft-data (aka consumer and business sentiment). The S&P500, Dow, and Nasdaq were each more than -1% lower for the Easter holiday-shortened trading week and broadly some -2.8% below their all-time highs set on March 1. While economic data has not broken down nor is it suggesting that the economy is slowing, it is yet to reveal a very noticeable uptick in the pace of activity either. In addition to the weakening sentiment over the growth outlook, there have been too many changes recently for the markets to completely shrug off; most notable recently is the rise in geopolitical risks including the strike on Syria by the US a week ago and another bombing effort targeting ISIS in Afghanistan late last week all while tensions continue to rise between the US and Russia, as well as rising hostility and displays of provocation from North Korea. These events are capturing the focus of investors and upping the uncertainty of what intensifying global conflict may look like on the soft-data.

From an economic fundamentals perspective, the weight of evidence continues to support the view that the US and global economy is doing fine and not at risk of a recession. Unemployment claims, construction equipment dealers, the oil rig count, as well as mortgage applications for purchase, consumer comfort, and global leading indicator index continue to post respectable numbers. At the same time however, traditional US retail (brick & mortar) continues to snatch headlines and paint a picture of slipping demand; it is worth noting that many of the troubled retailers are companies whom which broad swaths of consumers shop regularly and thus carry outsized headline risk. With that said, online retail is it logging growth that more than explains the decline in physical retail locations, so it would appear that consumers are still spending, but shifting their activity online and away from the local stores. Corporate earnings season is also underway for the 1Q period, and looks set to post gains of around +3.3% over last year; this is helping credit spreads remain tight and inflation expectations relatively firm.

Bringing everything together, we sense that a number of investors are growing anxious following what has been a very strong 6 month period. There is also of course the perspective that the current bull market phase is quite aged by historical standards no 8+ years and counting and early-year momentum is slowing. It is no secret that from an absolute level, financial markets and stocks are not inexpensive, an attribute that historically implies below-average forward returns. In agreement, we have highlighted for several months now the potential for a near-term pause or drawdown to occur, especially amid diminishing hope that a non-traditional President might be able to change the level of political dysfunction we have grown accustomed to. But while we would not be one bit surprised to witness a pullback by the markets, especially amid rising geopolitical concerns and a softening growth outlook by investors, the signposts for a more sinister unraveling or end to the current economic expansion are not in place. Historically, rising corporate earnings preclude a recession and bear market occurring in the near term. Additionally, investor sentiment remains all but euphoric, if anything seems more stuck in the skeptical category. From our perspective, this remains a market that is not young, but also lacks an easily identifiable excess that threatens the economic outlook. Historically an expanding economy has minimized the risk of a bear market and/or economic recession. That view is only further reinforced by the majority of economic readings outside the US and most notably China (being the 2nd largest global economy) that are also in an improving trajectory and is like having the wind at your back. Again, we believe the markets may continue to consolidate near-term, but full-year outlook is one that rewards remaining in the game.

March drew to a close Friday, with the S&P500 notching a respectable gain of +0.8% for the week. With that, the 1Q concludes with a very strong gain of +6.1% when including dividends (total return) despite the month of ending in a relative wash (+0.1%). Putting the first 3 months of 2017 in context, the S&P500 enjoyed gains in excess of 5% to begin a New Year 24 times since 1950. In those instances, 2Q and rest-of-year performance was skewed to the upside, even though almost all years experienced a pullback of -10% or more at some point which we obviously have not yet seen to-date. Yet perhaps more interesting than the strong performance is the strength of foreign markets especially during March after a several year hiatus and being a performance detractor. It would seem that for the first time in recent memory, foreign economic fundamentals are working in concert to create an economic backdrop that is more globally broad.

From a fundamental perspective, the most recent week was mixed in the US. Retail surveys, unemployment claims, bank lending, consumer comfort, and leading indicators softened a touch while at the same time home sales, corporate profits, the rig count, and a host of foreign indicators showed improvement. Additionally, fresh news out of Washington seems to be quieter following the prior week failure of the new Trump administration and Republican led congress to put forward a vote on reform/repeal measures on healthcare (insurance marketplaces) reform. As a result of that setback, analysis of recent factor performance suggests that investors are placing lower odds on tax reform success, which is visible through companies with the highest tax rates giving back some of their post-election outperformance since the ACA stalemate a week ago last Friday.

Entering 2Q, historical analogues suggest it would be unwise to fight the trend. Yet the news cycle may be setting up for some near-term disappointment. This week, all eyes will be on the latest US employment report; with the February report being so strong some are quietly anticipating that March figures will miss expectations on the logic that unseasonably warm weather this past Winter and in January and February pulled forward seasonal hiring. Additionally, as much as one would like, political noise seems likely to be an attribute throughout much of 2017, especially as details on tax reform begin to flow and parties again dig in to argue partisan positions. Also a feature of the post-2009 economy has been one of two steps forward and often a soft patch. While economic data has been on an encouraging pace recently, are we due for disappointment? 1Q corporate earnings may also be interesting and watched for hard evidence that economic activity is improving, but should provide something of a floor for any downbeat headlines given that year-ago levels were very soft and pose easy comparison at least one more quarter. Be on the watch for our upcoming release of Nvest Nsights where we look to provide a more in-depth review of the 1Q and outlook ahead.