The final revision to 2016 fourth quarter U.S. GDP was released in March and showed that growth slowed to a 2.1% annualized rate, after showing a marked acceleration in the third quarter of 2016. However, personal consumption remained surprisingly strong, as consumer and business confidence indicate a level of optimism not seen in 15 years. The optimism and enthusiasm around prospects for the new administration quickly succumbed to the realities of politics, as the first major attempt to reshape the U.S. government stumbled over the health care initiative. This setback has dampened expectations for extensive tax reform and additional stimulus programs. Nevertheless, there is still a large disparity between “soft” survey data, which reflects a high degree of optimistic sentiment about the future, and the “hard” data that reflects low to moderate economic growth.
The Federal Reserve met in January and again in March. The FOMC maintained its federal funds rate at 0.5% to 0.75% at the January meeting but, in a widely anticipated move, raised the rate by 0.25% at the March meeting. Fed officials left their economic projections almost entirely unchanged and will assess realized and expected economic conditions relative to its objectives of maximum employment and 2% inflation in determining the timing and size of future interest rate adjustments.
Equity markets moved higher through the first half of March, but sold off on the failure of the health care initiative, before climbing back to end the month relatively flat. The S&P 500 Index returned 0.1%* in March, while the smaller stock indices trailed in performance. The S&P SmallCap 600 Index was essentially flat posting a -0.1%* loss for the month and the S&P MidCap 400 Index registered a -0.4%* loss. Growth-oriented equity management approaches outperformed Value-tilted strategies for the month and investors rewarded the stocks of companies exhibiting improving analyst expectations and stronger price momentum. The Russell 1000 Value Index returned -1.0%* in March, with the more interest rate sensitive sectors generally underperforming and led lower by the Financials (-3.0%)* and Real Estate (-2.3%)* sectors.
The U.S. Dollar Index measures the value of the U.S. dollar relative to its most significant trading partners and was down slightly less than 1% in March. The Canadian dollar is often influenced by energy prices, but it was essentially flat against the U.S. greenback in March, despite a 6.3% increase in oil prices over the month. The U.S. dollar had essentially no impact upon the Fund’s March performance. Looking forward, strengthening economic growth in the U.S. has raised the prospects for higher interest rates, while oil appears contained at the upper end of its price range over the past year. These fundamentals would suggest an outlook that supports U.S. dollar strength in the near term.
The Fund carried its largest relative sector overweight in Consumer Discretionary stocks to benefit from higher anticipated discretionary spending associated with the favorable levels of consumer confidence. This scenario paid off in March with holdings in the Hotels, Restaurants and Leisure industry posting strong relative returns. However, a holding in a popular retailer detracted from the Fund’s relative performance for the month. Conversely, the Fund has maintained an underweight in Consumer Staple stocks, where we find it difficult to find attractively valued stocks; the underweight marginally hurt relative performance, but was offset by favorable stock selection with in the sector. The Fund’s slight under allocation to the Industrials sector relative to the benchmark had no effect upon performance, but stock selection within the sector was favorable.
The Fund held an underweight to the worst performing Financials sector, which benefitted relative performance in March. Stock selection in the Capital Markets and Insurance industries helped performance, and an overweight to the Mortgage REIT industry also helped relative performance during the month.
The Fund carried an overweight to Information Technology, reflecting the higher prospects for earnings and dividend growth that the sector provides. In the Information Technology sector, positions in some established, well-known companies helped performance, while some relatively smaller companies detracted from the Fund’s performance.
Fourth quarter operating earnings for the S&P 500 Index rose 21%* year-over-year (“YOY”), representing the strongest growth in three years. First quarter earnings reporting season begins in April with analysts’ consensus of S&P 500 Index operating earnings forecasting a rise of 21.6%* for the quarter and expectations for about 22%* growth in YOY earnings for 2017. While the U.S. economy appears healthy and the global economy seems to be improving, we are skeptical that profit growth can exceed 20%* at this later stage of the business cycle and would look for growth around half as much.
At quarter-end, the S&P 500 Index traded at 18.2X the consensus 2017 operating earnings estimate of nearly $130*, well above its 15-year average of 15.5X. The Federal Reserve has taken notice, with March meeting minutes indicating a concern over high equity valuation measures. As interest rates move higher, equity markets must transition from an interest rate-driven bull market to an earnings-driven bull market and multiple expansion could become more difficult.
The Fund is well diversified across economic and industrial sectors and is positioned for an economic environment of improving growth, where we believe stocks with consistent earnings growth, dividend increases and stock repurchases will do relatively well. The portfolio has been positioned to take advantage of an improving economy, while providing potential protection against periods of weakness.
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This release may contain “forward-looking statements” which reflect the current expectations of NGAM Canada LP and/or its sub-advisor, Ziegler Capital Management, LLC. (“Ziegler Capital 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 Funds prospectus, which is available on NGAM Canada LP’s website and on SEDAR at www.sedar.com. 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 Ziegler Capital Management believes to be reasonable assumptions, NGAM Canada LP and Ziegler Capital 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 Ziegler Capital Management do not assume any obligation to update or revise them to reflect new events or circumstances.”