The first quarter of 2017 started out with solid but uneven gains. All the major indexes gained ground with the technology focused NASDAQ gaining the most. The quarter began with optimism for the economy, with expectations of strong earnings growth and the real prospect of favorable economic policies from Washington. The S&P 500 closed the quarter up 5.5%. The Dow Jones Industrial Average ended the quarter up 4.6% while the NASDAQ Composite finished up 9.8%. From the market’s bottom during the financial crisis on March 9, 2009, the S&P 500 has increased 249%.
Some of Wall Street’s optimism has tempered after the failure to repeal the Affordable Care Act (ACA) coupled with increasing geopolitical risks. Also, weighing on the market is the coming French election and the anticipation of tighter monetary policy by the Federal Reserve. Stocks were driven higher in the first quarter with the expectation of favorable economic policy out of Washington, namely tax cuts, and accelerating earnings growth in 2017. The failure of the ACA raises questions as to whether the more substantive economic policies will be enacted anytime soon. Combined with increased potential of geopolitical risk and tighter monetary policy, we expect investors to reassess the outlook. This does not mean that we are due for a correction or that the eight-year bull market is “tired”. Stock prices are valued based on earnings and the outlook for earnings has been very positive going into 2017. Concerns about geopolitical risk, for example, don’t directly or immediately impact earnings, but if they blow up into a real global crisis that reduces demand or makes operating business more expensive, then future earnings are affected and equity prices need to be readjusted accordingly.
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