Natixis Canada Blog

Markets Hit a New High on Positive Economic Backdrop

Dennis Ruhl, Portfolio Manager, NexGen U.S. Growth Funds

U.S. equity markets continued to advance in January as fourth-quarter earnings results were solid and economic data pointed towards continued growth, which offset declining optimism that President Trump can fully implement his pro-growth agenda. The S&P 500 Index reached a new all-time closing high of 2,298.37* on January 25. U.S. equity markets drifted lower in the month’s final days as President Trump signed executive orders on trade policy and immigration. Investors fear that the president’s stance on trade and immigration are counterproductive to the pro-growth policies he looks to implement. Large-cap stocks as represented by the S&P 500 Index gained 1.9%*, outperforming small-cap stocks measured by the Russell 2000 Index, which rose 0.4%*.

The current advance of U.S. equity markets has been predicated on improving nominal gross domestic product (GDP) growth, the anticipation of corporate tax reform and less regulatory pressures coming out of Washington. The reacceleration of economic growth has been in place since the second half of last year, which is being reflected in fourth quarter earnings. Fourth-quarter estimates for S&P 500 earnings currently are $30.16* a share. This is a 5.1%* increase from the prior quarter and a 30.8%* increase from the fourth quarter of 2015. As of month-end, 205 of the S&P 500 companies reported, with 67% exceeding earnings expectations. Not surprising given the rebound in commodity prices, the materials and the energy sectors are experiencing outsized earnings growth. Alternatively, the telecommunication services and industrial sectors have seen negative earnings growth. Industrial companies are struggling to grow organically, while in the telecommunication services sector, aggressive wireless pricing is putting pressure on margins.

Economic releases, while not robust, continue to point towards moderate growth in the U.S. The December Employment Report was weaker than expected as the U.S. economy added 156,000 new jobs versus consensus expectations of 175,000. While the growth in employment is moderating, the labor market remains healthy. Based on the December Employment report, the U.S. economy added 2.16 million jobs in 2016. Layoff announcements as measured by Challenger, Gray and Christmas, an outplacement and career consulting firm, show higher job cuts in January  than in December, but down 38.8% from January last year. Housing data for December was mixed as housing starts increased 11.3% from the prior month, while existing and new home sales declined 2.8% and 10.4%, respectively. Despite the December decline, full-year 2016 existing home sales increased 3.8% from 2015 while new home sales are estimated to have increased by 12.2%.

The “Trump” rally waned in January resulting in a shift of market leadership. The financials, telecommunication services and energy sectors, all of which were top performers after the election, underperformed the S&P 500 in January. Additionally, large-cap stocks outpaced small-cap stocks while growth outperformed value. The top-performing sector in the S&P 500 was the materials sector where 73% of companies that reported fourth-quarter results have exceeded expectations, advanced 4.6%. The worst performer was the energy sector where only 50% of companies have beaten bottom-line estimates, leading to a 3.6% decline.

Portfolio Review

Net of fees, the NexGen U.S. Growth Tax Managed Fund fell short of the return of the Russell 1000 Growth Index. At the stock level, our positions in Twenty First Century Fox, Amazon and VMware were the top contributors for the period. Alternatively, performance was negatively impacted by stock selection in the health-care and telecommunication services sectors. At the stock level, our positions in Ariad Pharmaceuticals (underweight), Aetna and Gilead Sciences were the top detractors for the period.

From our proprietary attribution framework1, during the period, the Alpha Model and Stock Specific contributed to performance, while our Risk Exposures and Sector Selection detracted from performance. From a factor perspective, Momentum was our largest contributor, partially offset by our factors related to Valuation and Quality.

Total Initiations and Eliminations during the Month:

Initiations during the Month:



DNKN DUNKIN’ BRANDS GROUP INC Improvement in Value factors
CAG CONAGRA BRANDS INC Improvement in Quality factors
IAC IAC/INTERACTIVECORP Improvement in Value factors

Eliminations during the Month:



SDRL SEADRILL LTD Deterioration in Momentum factors
VMI VALMONT INDUSTRIES Deterioration in Momentum factors
GDDY GODADDY INC – CLASS A Deterioration in Quality factors
RHT RED HAT INC Deterioration in Momentum factors
PSA PUBLIC STORAGE Deterioration in Momentum factors


We continue to believe that most of President Trump’s stated polices are pro-growth and the prospect of corporate tax reform, increased fiscal spending and less regulation are positives for equities. However, we also maintain the view that caution is warranted regarding the post-election enthusiasm. There still remains a large degree of uncertainty as to what the final outcome of President Trump’s broad agenda and when proposals will become law. This uncertainty has only increased after President Trump implemented controversial executive orders regarding trade policy and immigration. The process of putting significant reforms through Congress is expected to be contentious and quite lengthy. We consider it a strong possibility that President Trump’s ambitious proposals may be scaled back and implemented later than expected as the legislative process unfolds.


We are cautiously optimistic that the potential positives for the U.S. economy of President Trump’s agenda consisting of lower taxes and less regulation could outweigh the negatives, such as potential trade wars and increased geopolitical risk. Therefore, our base case is a slightly faster growth rate for the U.S. economy and an economic expansion that extends itself further. However, there are risks. One area of focus will be on consumer and business confidence. If consumers and businesses remain confident, there is a high likelihood that the incremental fiscal stimulus will be spent and invested. If the negative impact of President Trump’s policies erodes consumer and business confidence, we will not see much of a stimulus at all, but rather a short-term boost to earnings and savings.

While we acknowledge several uncertainties exist here in the U.S. and abroad, we maintain the view that the U.S. economic expansion will continue. Initial data releases for January are encouraging. U.S. manufacturing continues its recovery as the Markit U.S. Manufacturing PMI™ (Purchasing Managers Index) for January posted a reading of 55.0, an acceleration from the 54.3 print for December. The details within the report were also promising as improved client demand and intent to increase inventory boosted growth in new orders to a 28-month high. We also are encouraged that manufacturing is accelerating globally. The Markit Eurozone Manufacturing PMI® print of 55.2 for January is at a 69-month high while the Nikkei Japan Manufacturing PMI™ posted 52.7 to start 2017, its highest reading since March of 2014. The only point of caution is that pricing pressures have intensified mostly due to higher raw materials prices.

For more information about NexGen U.S. Growth Funds, please contact your financial advisor.

* In USD

1 Proprietary attribution definitions:

Alpha model – illustrates the performance impact of our proprietary value, quality, and momentum signals

Sector selection – performance impact of sector bets

Stock specific – performance impact of stock specific events

Risk factors – performance impact of incidental factor bets in the Fund

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in value and reinvestment of all dividends or distributions and do not take into account sales, redemptions, distributions or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities ae not covered by Canada Deposit Insurance Corporation or by any other government deposit insurer.

This release may contain “forward-looking statements” which reflect the current expectations of NGAM Canada LP and/or its sub-advisor, JPMorgan Asset Management (Canada) Inc. (“JPMorgan Asset Management”). These statements reflect the applicable management’s current beliefs with respect to future events and are based on information currently available to such management. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements including, without limitation, those listed under the heading “Risk Factors” in the NGAM Canada LP’s NexGen Funds prospectus, which is available on NGAM Canada LP’s website and on SEDAR at Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking statements contained in this release. Although the forward-looking statements contained in this release are based upon what NGAM Canada LP and/or JPMorgan Asset Management believes to be reasonable assumptions, NGAM Canada LP and JPMorgan Asset Management cannot assure investors that actual results, performance or achievements will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this release and NGAM Canada LP and JPMorgan Asset Management do not assume any obligation to update or revise them to reflect new events or circumstances.

Leave a Reply

Invest better: Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer.