Q1 Review: Politics, Populism and Your Pocketbook

April 11, 2017 in Market Commentary by

The end of 2017’s Q1 draws to close a quarter that saw the bull market ushering in its ninth year and politics domestic and abroad impacting markets in the United States and beyond.

The New Administration & the Markets

Politics certainly played a starring role in the U.S. market’s direction. Initial policy stumbles by the new administration may have actually contributed to gains as it became evident that Donald Trump will face considerable checks and balances, even within his own party. Most importantly, we know that while President Trump seeks big policy initiatives, most of the economy will continue to move forward much as it did before the election. 

Politics aside, however, earnings growth on the corporate front reported from Q4 was more than enough to support the rally, according to FactSet. S&P 500 earnings grew 5% year-over-year and are estimated at 9.1% for Q1, and if met, this would be the highest quarterly growth rate since 2011. More so than politics, this was likely the true driver of a strong Q1.

Populism in the EU

It wasn’t just in the United States where politics took the spotlight, however. After simmering in Europe for years, Populism has gained traction and begun to have a market impact. Many Europeans want to maintain more control of their borders and no longer want trade rules dictated by the EU. The trend is a threat to the EU, and is likely one reason U.S. stocks have outperformed over the past few years. However, this quarter, international stocks outperformed the U.S. Much of this was currency related. The post-election dollar rally partially reversed as it became clear the new administration’s spending plans will face opposition. The euro got a boost in March with the defeat of far-right candidate Geert Wilders in the Netherlands.

Style Rotations Within Equity Markets

Perhaps more so than at any time in this bull market, we think it is important to stay diversified at the sector level.

Q1 featured a few notable style rotations within equity markets. Energy and communications, two of the best performing sectors last year, were the two worst. As we often say, sector leadership is always cyclical. One year’s biggest winners are frequently the next year’s biggest losers. While the technology sector isn’t nearly as overvalued as it was in 1999, and traditional value sectors are not as overlooked, there are similarities. Perhaps more so than at any time in this bull market, we think it is important to stay diversified at the sector level.

The Department of Labor’s Fiduciary Rule

The Department of Labor’s fiduciary rule, originally set to go into effect on April 10, suffered a series of setbacks in the quarter. The rule states that financial professionals working with retirement accounts, including IRAs, must put their client’s best interests first. Right now, there has been a 60-day delay implemented, but the final fate of the rule remains uncertain. Regardless of what happens to the rule, Personal Capital is a Registered Investment Advisor. We have always and will continue to act as a fiduciary and in our clients’ best interests.

The Fed & Rising Interest Rates

The Fed stayed on course – it raised short-term interest rates 0.25% late in Q1 and reiterated an expectation of two more hikes over the remainder of the year. Amid talk of rising interest rates, fear surrounding bonds remains elevated, yet much of it is misguided. Bonds still managed modest gains in this environment.

The Takeaway

Media and investor focus remains fixated on President Trump and the political landscape. But in our view, the private sector and the broader global economy is likely to be the bigger driver for stocks in the coming years. Despite the gloom-and-doom tone of the election and pockets of geographic weakness, the overall economy is robust and stocks reflect it.

To learn more about this quarter, read our free Q1 Market Review and Commentary.

The following two tabs change content below.
Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

Leave a Reply

Your email address will not be published.

Disclaimer. This communication and all data are for informational purposes only and do not constitute a recommendation to buy or sell securities. You should not rely on this information as the primary basis of your investment, financial, or tax planning decisions. You should consult your legal or tax professional regarding your specific situation. Third party data is obtained from sources believed to be reliable. However, PCAC cannot guarantee that data's currency, accuracy, timeliness, completeness or fitness for any particular purpose. Certain sections of this commentary may contain forward-looking statements that are based on our reasonable expectations, estimate, projections and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.