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.