Volatility returned to U.S. equity markets as investors began to question the ability of President Trump to fully implement his pro-growth agenda. The S&P 500 Index reached a new all-time closing high of 2395.96 on March 1. However, equities started to drift lower as opposition to the American Health Care Act of 2017 (AHCA) increased while crude oil prices fell below $50.00 a barrel. The S&P 500 experienced its first 1%* decline since October 2016 on March 21as it became apparent the AHCA would not have the votes to pass through the House of Representatives. Equities recovered in the month’s final week as President Trump immediately shifted his focus to tax reform. Small-cap stocks measured by the Russell 2000 Index gained 0.13%* and barely outperformed large-cap stocks as represented by the S&P 500, which rose 0.12%*.
While most of the headlines revolved around the Trump administration’s pro-growth agenda, a fair amount of the equity markets’ advance can be attributed to the ongoing improvement in global economic growth. In particular, the U.S. employment picture continued to surprise to the upside. The February Employment Report shows the U.S. economy added 235,000 new jobs, versus expectations of 200,000. The Job Openings and Labor Turnover Survey (JOLTS) reported 5.63 million job openings in January. While down 1.5% from a year ago, the 3.22 million people who voluntarily quit their jobs is the highest level since February of 2001. This may indicate workers are becoming more confident in the U.S. economy, comfortable enough to leave their current job and find better employment elsewhere.
As the market based probability for the Federal Reserve (Fed) to raise interest rates was 100% leading up to the March meeting, it was a non-event that the Fed decided to raise rates by 0.25% to a range of 0.75% to 1.00%. The March increase was the first time interest rates have been raised at back-to-back press conference meetings in the current interest rate cycle. Fed Chairwoman Janet Yellen chose to announce the decision as a “gradual reduction in the amount of monetary policy accommodation” to emphasize this point. Given the strength of the economy, some investors believed that the Fed may become more aggressive in raising interest rates as implied probabilities indicate a slight chance of four interest rate increases this year. However, after the release of the March forecast for the federal funds rate, the Fed still expects to raise rates two more times in 2017.
While the S&P 500 barely budged in March, a rotation continues to occur beneath the surface. The information technology and consumer discretionary sectors were the month’s top performers. Strength within the technology sector was driven by hardware and semiconductors. The strength in consumer discretionary was mostly attributed to consumer services and internet retail. The common thread between the month’s leading sectors is that both benefit from an improving economy.
The month’s worst performers were the financials and the telecommunication services sectors, both of which had been top performers immediately following the November presidential election. The yield on the U.S. 10-year U.S. Treasury bond rose from 1.83%* the day before the election, peaking at 2.63%* on March 13. As equity markets became more volatile and crude oil prices fell, U.S. Treasuries rallied with the yield on the 10-year U.S. Treasury bond finishing the month at 2.39%*. Declining bond yields and a flattening yield curve pressured the financials. The telecommunication services sector, which had been regarded as a large beneficiary of corporate tax reform and deregulation, continued to pursue aggressive promotional activities, pressuring margins and profitability.
NexGen U.S. Growth Fund
At the stock level, our positions in Activision Blizzard, Applied Materials and Align Technology were the top contributors for the period. Alternatively, performance was negatively impacted by stock selection in the health-care and materials sectors. At the stock level, our positions in Amgen, Science Applications International and Ross Stores were the top detractors for the period.
From our proprietary attribution framework1, during the period, the Alpha Model and Stock Specific made the strongest contributions to performance, while Risk Factors and Sector Selection detracted. From a factor perspective, Momentum was the largest contributor to performance.
Total Initiations and Eliminations during the Month:
Initiations during the Month:
|EXP||EAGLE MATERIALS INC||Improvement in Value factors|
|BA||BOEING CO/THE||Improvement in Value factors|
|GM||GENERAL MOTORS CO||Improvement in Momentum factors|
|WEN||WENDY’S CO/THE||Improvement in Value factors|
|PCLN||PRICELINE GROUP INC/THE||Improvement in Value factors|
|BG||BUNGE LTD||Improvement in Quality factors|
|AGN||ALLERGAN PLC||Improvement in Momentum factors|
|RE||EVEREST RE GROUP LTD||Improvement in Value factors|
Eliminations during the Month:
|MRO||MARATHON OIL CORP||Deterioration in Quality factors|
|FCX||FREEPORT-MCMORAN INC||Deterioration in Value factors|
|LLL||L3 TECHNOLOGIES INC||Deterioration in Value factors|
|PWR||QUANTA SERVICES INC||Deterioration in Quality factors|
|HII||HUNTINGTON INGALLS INDUSTRIES||Deterioration in Momentum factors|
|NOC||NORTHROP GRUMMAN CORP||Deterioration in Value factors|
|KORS||MICHAEL KORS HOLDINGS LTD||Deterioration in Value factors|
|KSS||KOHLS CORP||Deterioration in Value factors|
|DKS||DICK’S SPORTING GOODS INC||Deterioration in Quality factors|
|MO||ALTRIA GROUP INC||Deterioration in Quality factors|
|ENR||ENERGIZER HOLDINGS INC||Deterioration in Momentum factors|
|ATVI||ACTIVISION BLIZZARD INC||Deterioration in Value factors|
|HPE||HEWLETT PACKARD ENTERPRISE||Deterioration in Value factors|
|QCOM||QUALCOMM INC||Deterioration in Value factors|
|VZ||VERIZON COMMUNICATIONS INC||Deterioration in Value factors|
Our fundamental outlook for continued U.S. economic expansion and associated growth in corporate earnings remains intact. However, we would be remiss not to address the risks currently facing U.S. equity markets. First, ever since the election, confidence measures for CEOs, consumers and homebuilders are at multi-year highs. Confidence measures can be referred to as “soft data.” However, when you look at the “hard data,” capital spending is well below prior cyclical peaks, the growth in retail sales has been slowing and the level of housing starts is just about at long-term averages. Market volatility may increase if the changes in sentiment felt across the U.S. economy do not eventually result in changes in both corporate and consumer spending decisions.
We have often stated that caution is warranted regarding the post-election enthusiasm as we are unsure to what extent President Trump can fully implement his pro-growth agenda. This risk has only increased after the failure of Republicans to unite and pass the American Health Care Act of 2017. Equity markets appeared to shrug off the legislative failure as the president quickly shifted his focus to tax reform. However, there remains a large degree of uncertainty about the final outcome of President Trump’s broad agenda and when proposals will become law. We do not attempt to handicap potential outcomes from Washington as that is not our value add. That said, declining approval ratings may reduce the chance of success for meaningful tax and regulatory reform.
U.S. manufacturing continues to expand; the Markit U.S. Manufacturing PMI™ for March posted a reading of 53.3. While down slightly from 54.2 in February, business conditions continue to improve. It is also encouraging that manufacturing continues to accelerate globally. The Markit Eurozone Manufacturing PMI® print of 56.2 for March is at a 71-month high. Strength was cited in both production and new orders. The Nikkei Japan Manufacturing PMI™ March post of 52.4, while down from the February reading of 53.3, remains firmly in expansion territory. The synchronized improvement in manufacturing confirms our view that the global disinflationary shock investors feared in the beginning of last year continues to fade.
For more information about NexGen U.S. Growth Funds, please contact your financial advisor.
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
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