Volatility Returns as Investors Start to Rethink the “Trump Trade”
Sources: Equity Market and Fixed Income returns are from JP Morgan as of 3/24/17. REIT, Rates and Economic Calendar Data from Bloomberg as of 3/27/17.
The S&P 500 Index fell 1.4% last week and snapped its streak of over 100 trading days without a loss of 1% or more. The shallow selloff was a bit steeper for the Russell Midcap Index which fell 1.5% and the Russell 2000 Index which fell 2.6%. The Utilities (+1.3%) and REITs (+0.8%) sectors offered some protection as they represented the only areas of the market to end the week with gains. Financials, conversely, led the stock market lower with a loss of 3.8%. Despite the recent return of downside volatility, domestic stocks are still firmly in positive territory for 2017 with a year-to-date (YTD) gain of 5.2%. Internationally, developed markets finished last week essentially flat while the MSCI Emerging Market Index gained 0.4%.
While stocks fell last week, fixed income assets gained and the yield on the 10 year U.S. Treasury declined to 2.40% from 2.50%. Gold, typically serving as a safe haven to certain investors, posted a positive return of 1.5% on the week. The risk-off trading sentiment has been attributed to the GOP’s inability to pass Health Care Reform, despite controlling both the Executive and Legislative branches. Since the election, the market has been lead higher partially due to expectations for tax reform, lower regulation, and infrastructure spending. These policies, however, may not be so easy to pass as evidenced by last week’s struggles with Health Care Reform. While we still believe that some form fiscal stimulus and regulatory reform will take place, it may not be to the degree that was initially expected and/or may take longer to implement than many were anticipating. This scenario could lead to short-term periods of volatility related to Trump Expectation Syndrome (TES) that we wrote about earlier. https://www.hennionandwalshtrending.com/investors-beware-of-trump-expectation-syndrome/
Fortunately for equity investors, financial conditions remain generally supportive for stocks. Many gauges of economic activity, including Manufacturing and Service PMI’s as well as housing data have moved higher this year. Consumer confidence has also trended upward since the election suggesting that the gains seen so far in 2017’s consumer spending data have the potential to increase even further. Until wages meaningfully pickup, increased economic activity along with a recovering energy sector should be supportive of earnings growth and further support current stock valuations.
U.S. stocks have certainly been the winner over the past five years but last week should serve as a reminder to investors that diversification is an important tool in helping to reduce portfolio risk and maintaining discipline. Many investors may find it more appealing to have a diversified portfolio strategy that offers some downside protection than it would be to have a concentrated stock portfolio during a selloff. If you would like to have a portfolio review or a more comprehensive financial plan completed, please do not hesitate to speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management.
Important Information and Disclaimers
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.