March goes out like a lamb

Mike Loewengart, Vice President of Investment Strategy

E*TRADE Capital Management

04/03/17

With the plethora of news circulating the major outlets this month, you’d think the market would have been tumultuous. And to be sure, policy events dominated the financial headlines in March, including the proposed health care reform and the Federal Reserve (the Fed) raising a benchmark interest rate.

But for the most part, the markets were relatively quiet. For example, the S&P 500® only had two days with performance that exceeded 1% in either direction. Movement among major indexes suggests that if anything, investors were reminded not to put the cart before the horse. As the month came to an end, the market recalibrated its expectations for substantial legislative reform following the latest failed bid to overhaul the Affordable Care Act.

Meanwhile, the Fed increased the Fed funds target range to 0.75–1.00%. The market seemed to take the news in stride, amid Fed officials telegraphing their intentions early and often in the weeks and days preceding the decision. The Fed cited healthy economic growth, a steadily expanding labor market with wage growth, and a continued pickup in inflation as reasons for the increase. The second hike in three months suggests the Fed could be on its way to normalizing interest rates, and speaks to an improving economy, while maintaining modest core inflation. 

Domestic equities

The surge in equities during February cooled in March. Still, the market increased slightly for the month as investors digested potential implications for the rest of the Trump administration’s agenda.

Investors may also be preparing for a pullback. A correction would not be abnormal given the strength of the current bull market, and the fact that there has not been significant downward movement in more than a year. The S&P 500 was up 0.12% for the month, following February’s 3.72% surge. Notably, the S&P is still up a healthy 6.07% for the year.

An eight-day losing streak that spanned the run up to and the trading day following the health care news contributed to the Dow Jones Industrial Average’s 0.60% decline in March, versus February’s 4.77% rise. Even with that slight step back, the Dow is up 5.19% for the year.

Graph of equity performance

Source: Morningstar Direct

Information technology led the way again in March. Consumer discretionary, a solid cyclical sector, continued to perform with consumer confidence hitting a 16-year high, according to metrics from The Conference Board. Materials was the only other sector to post a positive return for the month.

On the other side, the Trump Trade (i.e., bullish trades off of sectors that stand to benefit from President Trump's proposed policies) reversed some, especially for certain value-oriented sectors. Financials, which have been awaiting the possibility of business-friendly tax reform and deregulation, declined the most during the month. Telecom and energy followed.

Graph of the best and worst performers March 2017

Source: Morningstar Direct

For the year, technology stocks remained the biggest gainers, followed by consumer discretionary and, perhaps to the surprise of some, health care. The sector was down 0.42% for the month yet remains one of 2017’s best performers, up 8.37%, despite the legislative uncertainty.
Year-to-date best and worst performers

Source: Morningstar Direct

International equities

Talk of the Trump Trade has dominated U.S. markets, but investors appear to be turning their gaze to international equities. Market observers point to attractive valuations and the growing uncertainty in the U.S. as drivers that helped the international space continue to gather momentum in March. Emerging markets remained a popular 2017 destination, with the MSCI Emerging Markets Index up 2.52% for the month and now up 11.45% for the year.

Graph of how international equities performed in March 2017

Source: Morningstar Direct

In emerging markets, India and Korea set the pace, along with Indonesia and Thailand. News of U.S. protectionism could be a catalyst for increased activity abroad, especially as it relates to trade. 
Graph of March 2017 emerging market performance by region

Source: Morningstar Direct

Fixed income

Some might have expected big moves in fixed income given the second Fed rate hike in three months and the legislative news in D.C., but March proved fairly subdued overall. Rates were lower on the month, and actually fell following the Fed’s announcement. The benchmark 10-year Treasury note ended March at 2.40%, lower than where it was before the Fed rate hike on December 14.

Graph of how domestic bonds performed in March and year to date

Source: Morningstar Direct

From a sector perspective, 3-5 year Treasuries and government intermediates led in March, versus long-term Treasuries and corporate investment-grade.
March 2017 best and worst fixed income sectors
Munis outpaced most taxable bond indexes in March, which some note could be a reflection of diminished expectations for expedited tax reform. Foreign bonds were mildly stronger, likely attributable to foreign currency strength.
As the economy continues on its moderate growth path, investors continued to hunt for yield in the equity-sensitive high yield sector in 2017.
Year-to-date best and worst fixed income sectors 2017

Source: Morningstar Direct

The bottom line

As investors reset their legislative expectations, a relatively quiet market like we saw in March presents an opportunity to review one’s appetite for—and approach to—more volatile trading days. When put within the context of a long-term plan, market volatility can be viewed as an opportunity. For example:

  • Pullbacks can be healthy. The market has been on a long bull run, and a pullback is never out of the question. Many market observers view pullbacks as normal events that improve the market’s overall health, especially with equity valuations looking high in the U.S.
  • Brexit may be an entrance. Britain’s divorce from the European Union could give investors the opportunity to capitalize on the volatility and explore investments that introduce international exposure to their portfolio, or increase their existing exposure.
  • Bonds are not to be ignored. Rising rates and potential Fed action do not mean investors should run from fixed income. Keeping the long term in mind can help quiet market noise and present opportunities that align with risk tolerance. 

Volatility is inevitable. But we believe investors with broadly diversified portfolios across asset classes and time horizons should be well-positioned for all types of market developments.

 

As always, thank you for reading.

Mike Loewengart

Vice President, Investment Strategy

E*TRADE Capital Management, LLC

 

Additional contributor:

Andrew Cohen, CFA

Director, Investment Strategy

E*TRADE Capital Management, LLC

 

Mike Loewengart is the Vice President of Investment Strategy for E*TRADE Capital Management, LLC. Mike is responsible for the asset allocation and investment vehicle selections used in E*TRADE’s advisory platforms. Prior to joining E*TRADE in 2007, Mike was the Director of Investment Management for a large multinational asset management company, where he oversaw corporate pension plan assets. Early in his career, Mike was a research analyst focusing on investment manager due diligence for the consulting divisions of several high-profile investment firms. Mike holds series 7, 24, and 66 designations, as well as the Chartered Alternative Investment Analyst (CAIA) and Certified Investment Management Analyst (CIMA) designations. He is a graduate of Middlebury College with a degree in economics.

Andrew Cohen is a Director of Investment Strategy for E*TRADE Capital Management, LLC. Prior to joining E*TRADE, Andrew was the Director of Investments and Operations for a large Registered Investment Advisor, where his responsibilities included investment manager research, asset allocation, and portfolio construction. Previously, he was a Senior Research Analyst and Team Leader for a leading wealth management platform. He is a CFA charterholder and a member of both the New York Society of Security Analysts and CFA Institute. He is a graduate of Virginia Tech with a B.S. in Finance.