Market Commentary – First Quarter 2017

Two-thousand, sixteen was a year characterized by profound and unexpected changes around the world. From Brexit to the presidential election, the results of these changes are that 2017 presents very different opportunities, and challenges, for investors, then previous years did.

As the fourth quarter began, and even in the prior months which led to the election, it was hard to know how the markets would react to either a Trump or Clinton victory. With either, it was hard to make a case as to why the markets would react favorably, as it was generally accepted that a vote for one would lead to higher taxes and more regulation, and a vote for the other would lead to international trade difficulties.

Despite the tone going in, investors clearly cheered the results of the election, perhaps as much because the uncertainly was over as much as for the result itself, and the markets were propelled higher in what will be known forevermore as the “Trump bump”. For markets, which were richly valued to begin with, the rally has given investors a simultaneous sense of relief, and sense of uncertainty.

The challenges we faced to economic growth are the same today as they have been for years. Every economic expansion of the past fifty years has had the benefit of falling interests to fuel growth. We don’t have this benefit today, as interest rates are already below reasonable levels, and are trending higher. Naturally this creates a headwind for growth, and one which is still likely to retard the stimulus of expansionary policies like lower taxes and deregulation. In addition, the specter of isolationist policies which could reduce international trade, may also affect economic growth in a negative way.

Headwinds notwithstanding, the overall tone is positive for economic growth and expansion, and some areas of the market should benefit as a result. Energy and defense are two areas which can clearly lead in an environment such as this. Healthcare, on the other hand, could go either way as the debate continues around affordable care. On balance, stock investors are likely to benefit the most, but it will still pay to be cautious, ever mindful of valuations, and always seeking investments in the highest-quality business. This has been the approach which has led to the best results for our clients in the past few years, and it’s how we will continue to add value in the year ahead.

Travis Raish, CFA