April 2017 Market Outlook

To imagine a more politically- or headline- charged market in the last 20 years would be difficult, to say the least.  Perhaps one thought crossing the minds of many investors is the belief that the “honeymoon” stage may have actually come to an end.

s and p since nov

The first quarter of the New Year finished as good a quarter for the stock market as ever.  Things are also looking up for the economy: the S&P 500 finished the month of March up 5.5% year-to-date, the best first quarter finish for the broad market stock index since 2013.  This was also the first quarter after an election cycle, so there may be some truth to this “Honeymoon Effect”.

The stock market has ridden a wave of enthusiasm since November.  The excitement for stocks appears to be built around the Trump Administration’s promises of tax reform, deregulation, and infrastructure spending.

In a manner of speaking, the stock market appears to have been wooed by some of the euphoric talk, but is now betrothed to reality of the challenging work that lies ahead in enacting these pro-growth reforms.

This is one explanation for the market’s weakness immediately following the failure of the new Administration to deliver on the promise of health care reform.  That setback has indicated to investors that the work between Congress and the White House moving forward will be done so cautiously.

Another dynamic that has absorbed the market’s attention of late is the increase in geopolitically driven headlines; Syria, Russia, and North Korea are now topping the news, raising yet another political proving ground for a president that had clear intentions to focus on the needs within our borders.  The resolution of these situations will take part in whether or not the market will be able to continue its rally.

Outside of the political picture, higher interest rates have yet to play the part of the “spoiler” that many investors thought they could.  As expected the Federal Open Market Committee (more commonly referred to as “the Fed”) raised interest rates during the first quarter.  This decision was perceived as fitting, given the continued strength in economic data.

For what it’s worth, our historical observations have indicated that the first three to four interest rate increases by the Fed are usually accompanied by better-than-average performances from stock market indices.  This makes intuitive sense since the reason that the Fed increases interest rates is to avoid an expanding economy from becoming too inflationary.

Bringing it back to the stock market, earnings season will kick-off in the coming weeks.  Last quarter’s results provided signs that companies were finally growing their top and bottom lines without the help of Quantitative Easing program, but instead by a healthier economy.

Valuation, according to the Price/Earnings ratio of the S&P 500 companies, has become stretched a bit though.  Currently, the PE ratio is estimated to be about 26 times earnings, much higher than the average PE ratio over the last ten years.

This quarter’s earnings results could provide validation that the market’s current valuations are the result of a strong economy that has yet to fully develop.  Such indication could be bullish for stocks. In respect to our comments above regarding this first quarter’s performance being the best since 2013: coming fresh off the 2012 elections and during similar political turmoil, it ushered in one of the strongest annual performances for the S&P 500. If history truly does repeat itself, just maybe the honeymoon isn’t over after all.

An investor cannot invest directly in an index. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.