The Brave Report: Market Commentary for March 2017

View the PDF version of this report here: The Brave Report-March 2017

The market continues to shrug. Even with a major presidential speech, numerous policy meetings, a rate increase and geopolitical news coming out of Europe, the market seems uninterested.  President Trump gave his first speech in front of congress on February 28th.  While we did see an initial market jump, it slowly returned to the flat line.  We saw similar reactions after the FOMC raised rates last week. The market just seems to be in a wait and see mode again; waiting for a real catalyst to add some directionality to the markets.

Market Overview

Over the last month, the markets have been pretty range bound again. This feels a little like the end of December and early January with the S&P 500 trading in a tight range and just scraping out small gains. The S&P is up by around a half a percent over the last month.  There was a small 1.4% jump following Trump’s speech to congress but this jump was short lived and the market gave all the gains back within a week. The NASDAQ had the biggest month of the three major indices but still only gained approximately 0.8% leaving it hovering around all-time highs. Continuing an interesting trend that I discussed in January, the S&P still hasn’t had greater than a 1% single day loss since October 11th.  The longest such streak we have seen since the current bull market started. Even with these small monthly gains, the markets have had a pretty good start to the year, with the S&P logging more than a 6% gain YTD.

The fixed income space also hasn’t seen much movement over the last month.  Even though the Fed raised rates at its meeting last week we saw very little movement in government bonds meaning the rate hike was largely expected and already priced in.  The yield on the 10-yr bond has actually dropped since the Fed statement.

Interest Rates: As was widely expected the Fed raised interest rates again at their meeting last week bringing the overnight lending rate to a target range of 0.75-1%. Even further, the statement from the Fed eased fears that they would take a more hawkish stance and indicate a faster pace of hikes. Additionally, little changed in terms of other expectations with other economic indicators including GDP and inflation. Based on the Feds projections from December and this meeting the market is largely expecting two more rate hikes this year but the Fed reiterated that future hikes would be data dependent. The reaction in the fixed income markets has been a slight drop in government yields.

In terms of how this spills over to everyday consumers, there won’t be a noticeable short term impact.  With future hikes on the horizon, we will probably see any floating rate debt adjust slightly higher. While mortgage rates are not directly tied to the fed funds rate, the impact will eventually trickle through to mortgages but the rate increase shouldn’t be that noticeable at this point.

In general, the rate hike should be viewed as a positive sign for the economy.  It reflects the view by the Fed that the economy is growing and job growth is stable.  It also shows that they are trying to reduce their role as an economy stimulator. This stimulation was needed during the financial crisis, but the hope is that this role will be given back to congress and the new administration as is traditionally the case.

Protectionism:  This was one of the cornerstone themes of Trump’s campaign and while very few details have emerged about any proposed import taxes, globally we are seeing this theme continuing to emerge.  In England, the march toward Brexit continues.  The government announced that they would formally inform the EU on March 29th of their intention to leave the bloc. This puts the timing of an actual exit at early 2019.

In last week’s Dutch election we saw the emergence of a far-right populist candidate. While he lost the election, it showed that this populist sentiment exists. A similar story is being written in France as well.  It doesn’t look like the populist candidate will win but again it shows that some of these populist, protectionist policies are resonating with large groups throughout the continent.

The G-20 also met over the weekend and for the first time in over 10-years they failed to reach an agreement to endorse free trade and reject protectionism.  This is a stark shift and one that is being championed by the Trump administration.  While the administration continues to maintain that they are not looking to get into a trade war, we will hopefully see some details emerge over the next few months about how they plan to renegotiate their trade relationships.

Trump Policy: President Trump spoke to a joint session of congress on February 28th. The speech was viewed by most as the most presidential he has looked since taking office. However, he still offered very little in terms of policy specifics.  This still leaves us in the dark on the specifics of many of his campaign promises but did reiterate to us that many of these promises are still a priority.

Trump did release a partial outline of his 2018 budget showing his proposals for discretionary spending.  In it, he proposed some significant increases in defense and security spending, including a 10% increase for Defense, a 7% increase for Homeland Security and a 6% increase for Veterans Affairs. To pay for these increases he has proposed some pretty widespread cuts across almost all other government agencies, including more than a 30% cut in funding for the EPA. All in, the result is a 1.2% decrease in discretionary spending. The proposal was obviously met with a partisan divide.  It is important to note that this is just an initial proposal and the final budget will be drafted and debated in congress.  This proposal continues to show us Trump’s consistency with his campaign promises. Whether they all come to fruition is another story.

Strategy commentary

With little overall market movement over the last month, I have continued to maintain our allocations, making very few moves at all.

My bias still remains toward the US.  While I am watching some select international markets, specifically the rebound in emerging markets and developed Asia, I am still content to wait to make any major moves.  In times like this, it is important to not feel forced to make moves in an effort to chase potential returns.  A disciplined approach and patience are important now to ensure that we are well positioned, from a risk-reward standpoint, when the market does make a move in one direction.

I am maintaining my over-weights to financials, industrials, technology and small-cap. A lot has been discussed about financials and industrials since the election, however, technology has actually been the best performing sector over the last three months, with financials lagging over that time frame.  I am still bullish on financials and industrials under the new administration but also think tech can continue to be a surprise winner.

I am still negative on fixed income and will continue to maintain more cash as a replacement for these fixed income allocations.

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