Natixis Canada Blog

Volatility Returns to U.S. Equities as Confidence in Trump’s Pro-Growth Agenda Fades

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

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:

Ticker Name Rationale
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:

Ticker Name Rationale
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

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.

Fund investments discussed herein are for informational and educational purposes only and should not be construed as legal, tax or investment advice. Information contained here is believed to be accurate and reliable at the date of printing, however, NGAM Canada cannot guarantee that such information is complete or accurate or that it will remain current. The information is subject to change without notice and NGAM Canada cannot be held liable for the use of or reliance upon the information contained here.

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 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.

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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.