2017 First Quarter Report

April 5, 2017

Could we be in the late stages of the current bull market? Over the last eight years, the S&P 500 index has returned more than 300%. However, the tail end of this run seems to have accelerated the trend. The first quarter of 2017 provided the highest returns for U.S. large-cap stocks since the last three months of 2013.

The widely-quoted S&P 500 index of large company stocks was up 6.07% in the first three months of 2017. Meanwhile, the Russell Midcap Index gained 5.15% in the first quarter. Investors in smaller companies posted a relatively modest 2.47% gain over the first three months of the year as measured by the Russell 2000 Small-Cap Index.

Even international investments were soaring through the start of the year. The broad-based EAFE index of companies in developed foreign economies gained 7.25% in the first three months of 2017, and emerging market stocks of less- developed countries, as represented by the MSCI Emerging Markets Index, rose 11.45%.

Looking over the other investment categories, real estate investments, as measured by the Wilshire U.S. REIT index, eked out a 0.03% gain during the year’s first quarter. The S&P GSCI index, which measures commodities’ returns, lost 5.05%, in part due to a 9.18% drop in the S&P crude oil index.

In the bond markets, rates are incrementally rising from practically zero to not much more than zero. Coupon rates on 10-year Treasury bonds now stand at 2.39% a year, while 30-year government bond yields have risen to 3.01%.

The pundits on Wall Street have been telling us that the market’s sudden meteoric rise—which really accelerated after the election—is the result of the so-called “Trump Trade,” shorthand for an expectation that companies and individuals will soon be paying fewer taxes and be burdened by fewer regulations, leading to higher profits and greater overall prosperity. Add in a trillion dollars of promised infrastructure spending, and the expectation was an economic boom across virtually all sectors.

However, there is, as yet, no sign of that boom. Instead, we are experiencing just a continuation of the slow, steady recovery that the United States has experienced since 2009. The latest reports show that the United States gross domestic product—a broad measure of economic activity—grew just 1.6% last year, the most sluggish performance since 2011. The U.S. trade deficit widened in January, and both consumer spending and construction activities are weakening from slower-than-average growth rates.

The good news is that corporate profits increased at an annual rate of 2.3% in the fourth quarter, which shows at least incremental improvement. This year the consensus estimates for the U.S. show earnings accelerating to double digit growth by year-end.

Going forward, we can be certain of one thing: as the bull market ages, we are moving ever closer to a period when stock prices will go down, perhaps as dramatically as 20%, which would qualify as a bear market, perhaps more or less. This is a good time to ask yourself:  how much of a downturn would I be able to stomach either before panic sets in or my lifestyle is endangered? If your answer is less than 20%, or close to that figure, this might be a good time to revisit your stock and bond allocations.

On the other hand, if you’re not fearful of a downturn, then you should look at the next bear market the way the most successful investors do. Envision what historically has been a terrific buying opportunity, a time when stocks go on sale for the first time in the better part of a decade. Warren Buffett is famous for being fearful when others are greedy and greedy when others are fearful. For some reason, people go to the shopping mall to buy when items go on sale, and do the opposite when the investment markets go down.  Knowing this can be an advantage to your future wealth, and even make you look forward to the end of this long, unusually steady, increasingly frantic bull run in stocks. After all, if history is any indication, the next downturn will be followed by another bull run.