Looking back at 2016, it was quite a financial roller coaster. For the first six weeks of 2016 as the market rapidly declined, it was in a “risk-off” period as momentum shifted to stocks that offered little or no growth.
The market leaders were defensive names that investors flocked to for their high dividends, known as bond proxies. Sectors such as utilities, telecom, and consumer staples led the market. Needless to say, growth stocks struggled right out of the gate. The tone of the market quickly became more positive in mid-February as commodities were recovering, China hadn’t fallen apart, and corporate earnings were better than expected.
This environment, which lasted well into the fall, was marked by a closer relationship between company specific fundamentals and stock price movements. In this more “rational” environment, bottom-up, fundamentally-driven process was somewhat rewarded. The presidential election introduced the final equity market environment for the year. The Trump victory, aided by Republican majorities in both branches of Congress, created the catalyst for a return to a “risk-on” environment as cyclical and interest sensitive stocks assumed leadership. The prospect of increased infrastructure spending, lower taxes, and deregulation spurred sector rotation into these sectors as investors targeted industries deemed to see the greatest benefits from policy changes under the new incoming administration. Growth-oriented sectors, such as technology, healthcare, and consumer discretionary experienced lackluster returns.
Reversals in leadership are par for the course, and we just witnessed another reversal as growth stocks substantially outperformed value stocks in the first quarter of 2017. The sectors that increased the most in the first quarter of 2017 are technology, healthcare and consumer discretionary -- yes, the same sectors that underperformed during the fourth quarter of 2016.
While short-term market movements are difficult to predict, company fundamentals are ultimately what we believe will determine a fund’s performance over the long run.