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QUA RT E R LY U PDAT E – F I R S T QUA RT E R , 2 017
The bull market in equities celebrated its eight-year
rates wouldn’t throw the economy off course. Mild
anniversary during the quarter. Since March 2009, the
inflation and low interest rates are typically positive signs
S&P 500 has more than tripled while over the same
for investors.
period, quality fixed income earned modest, but positive
While we are monitoring the likelihood of new
returns, cumulatively up 30-40%. The first quarter of
pro-business legislation from Washington, our
2017 followed roughly the same pattern — stocks and
investment views remain grounded on macroeconomic,
bonds each posted reasonable returns. This is happy news
fundamental and technical conditions. Below, we recap
for many investors.
quarterly results for the major asset categories using this
Pessimists say the stock and bond rallies are likely
framework. Our current investment outlook follows.
coming to an end, pointing out their remarkable longevBONDS ENJOY POSITIVE RETURNS
ity, high valuations, the uncertainties around the Trump
Fixed income investments benefitted from a broadly
presidency, tighter U.S. monetary policy and a set of
stable interest rate environment during the quarter.
further concerns around the globe. To us, one important
Intermediate term fixed income earned
question is whether the most recent
0.8% as measured by the Bloomberg
strength in equities was driven relatively
Barclays US Govt/Credit Index.1
more by (1) economic and investment
"Earnings growth
Intermediate and long-term Treasury
fundamentals or (2) hopes for quick
was
broad-based
with
yields
drifted slightly lower during the
political success by the Trump adminisquarter. In our view, the lack of progress
nine of the S&P 500’s
tration. The former can be managed
on tax reform and infrastructure
through disciplined investment work
eleven sectors
spending are capping investor
while the latter (political outcomes) may
(including the energy
expectations on growth and inflation.
require a more tactical approach.
sector)
reporting
Additionally, demand from overseas also
We believe macroeconomic and
higher
profits
than
helped keep U.S. interest rates low as
fundamental factors are important
investors sought safe havens from
reasons behind the equity rally. Notably,
one year ago."
election uncertainties in Europe.
economic reports indicate a mild upturn
Corporate bonds continued to see
in the U.S. economy and around the
strong
demand and outperformed
globe. The pace is still slow, but the U.S.
government debt of similar maturities. Yields on
economy continues to amble along and economic activity
corporate bonds were slightly lower (meaning prices were
is stirring in more countries overseas. The signals are
higher) reflecting improving corporate earnings. Yields
strongest in manufacturing, with indicators of factory
in non-investment grade fixed income were also slightly
activity showing mild growth in each of the major
lower; however they experienced a very volatile quarter.
developed economies. Economic momentum has helped
Yields for the shorter maturities, those two years and
nurture better corporate earnings, along with good
under, modestly rose after the Federal Reserve increased
margin control by management.
interest rates. Markets reacted calmly to the news
Low economic growth has also produced low inflation,
because the increase was small and it came after many
about 2%, and thus the Federal Reserve has acted
reports confirmed that growth, the labor market and
cautiously. The Federal Reserve increased interest rates by
inflation were consistently near Fed targets. The Fed has
one-quarter of a percentage point in March. Observing
sturdy job gains, a slight increase in inflation and rising
optimism, the Fed believed that a small step-up in interest
1
All returns shown are total returns through March 31, 2017
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a long history of saying its decisions are data dependent;
once it had confidence in the economic trends, a small
step up in interest rates was warranted.
Municipal bonds returned more than U.S. Treasury
bonds of comparable maturities. Munis were historically
cheap at year end relative to Treasuries and many
investors saw an opportunity for quick gains. Further, in
addition to traditional muni buyers, mutual funds were
buyers through new inflows. As such, despite healthy
new volume issuance, new supply could not keep up with
aggregate demand. At quarter end, the ratios of
municipal to Treasury yield declined to about 90%.
OVERSEAS EQUITIES SET ASIDE POLITICAL RISKS
Developed international equities outpaced the U.S.
market for the quarter, although a weaker U.S. dollar
contributed to the gain. The MSCI EAFE Index
returned 7.2% in U.S. dollar terms but only 4.7% in local
currency. In the short-run, when you own a foreign stock
in a weakening U.S. dollar, your investment returns are
increased (all else equal) because it takes less local
currency to translate back to U.S. dollars. In the longrun, the currency translation tends to have minimal
impact on investment returns.
European stocks led the gains followed by the U.K. In
Europe, economic growth accelerated to multi-year highs
as manufacturing geared up to meet new export demand.
Momentum in the services sector also strengthened. New
order growth subsequently triggered job growth in both
sectors. Similarly, the British economy has strengthened,
apparently shrugging off its Brexit blues. The British
central bank raised its forecast for 2017 economic growth
to 2.0%, up from last November’s 1.4% forecast, which
was itself an upgrade from the gloomy 0.8% forecast
from August. Overall, the business climate in mainland
Europe and in Britain is turning up, despite the political
uncertainty over the upcoming French elections.
U.S. STOCKS SURGE AS EARNINGS RECOVER
Domestic stocks rose over the quarter, lifted by
encouraging economic reports, better-than-expected
earnings results and optimism for the Trump
Administration’s policies. The S&P 500 returned 6.1% in
the first quarter and set a new record high in early March.
Small cap stocks earned 2.5% for the period, as measured
by the Russell 2000 Index. Small caps stocks had rallied
hard in 2016 and paused in the first quarter of 2017 to
digest their remarkable 1-year gain.
Investors were encouraged to see a second consecutive
quarter of earnings growth. Companies in the S&P 500
Index posted 4.9% overall earnings growth for the fourth
quarter, beating expectations for 3.1% and showing the
fastest growth rate since late 2014.2 The growth in the last
two quarters of 2016 broke the pattern of earnings
declines that began in early 2015. Additionally, earnings
growth was broad-based with nine of the S&P 500’s eleven
sectors (including the energy sector) reporting higher
profits than one year ago. The return of earnings growth is
important to our view of U.S. equities.
Expectations for President Trump’s pro-business
agenda further boosted sentiment for stocks for most of
the quarter. The pattern changed in late March when the
House Republicans failed to pass their health-care bill.
The stumble gave mixed signals to investors. On one
hand, investors reassessed the ability of the Republicans
to pass their own legislation. On the other, the
Republicans can turn attention to tax reform, which is
arguably more important for businesses and investors for
the next several months.
EMERGING MARKET EQUITIES SHINE
Emerging market equities outperformed developed
equity markets, including the U.S., for the first quarter.
The weaker U.S. dollar helped but returns were an
Equity Index Performance*
120
115
110
105
100
S&P 500 Composite Price Index
95
MSCI Emerging Markets Index (U$)
MSCI Eafe Index (U$)
90
Apr May Jun
Jul Aug Sep Oct Nov Dec Jan Feb Mar
2016
2017
*Indexes rebased to 100 on April 4, 2016
Source: Thomson Reuters Datastream
2 FactSet Research Systems Inc., March 2, 2017
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impressive 7.8% in local currency (using the MSCI
Emerging Markets Index).
One clear driver was positive macroeconomic data,
which translated to good returns for cyclical sectors. China
reported 6.8% growth for the fourth quarter of 2016 and
6.7% for the full year. Data for January was also reassuring,
particularly for manufacturing and trade activity. Indian
and Southeast Asian stocks also advanced on brisk GDP
growth, about 7% both in India and the Philippines.
Despite the positive returns, rising talk of more
protectionist agendas is worth watching closely.
Emerging markets in particular have reaped a large share
of the benefits of global trade (mostly via their cheap
exports) and should a bout of protectionism overtake
world leaders in the next one to two years, those benefits
may lessen. For now, we think a high quality approach
that adds exposure to non-U.S. markets — particularly
emerging markets on pullbacks — is the best approach.
LOOKING AHEAD
Forward motion in the global economy, better corporate
earnings and optimism for President Trump’s pro-business
agenda resulted in investment gains over the quarter, both
in equities and fixed income. However, the optimistic view
was challenged near quarter end as markets began to focus
on the failure of the Republican-led healthcare efforts in
the U.S., Brexit, and the upcoming French elections.
Consequently, clients may be wondering if it’s time to
dial risk down and hold more safe-haven assets. We
continuously monitor markets and adjust our advice as
our view changes; however, we believe the better course is
to keep your overall asset mix anchored to the broad
diversification in your strategic asset allocation. We
think the best chance of meeting your particular longterm wealth goals is through a disciplined allocation
approach that rebalances risks opportunistically.
In uncertain times, focusing on what you know,
instead of what you don’t know, is often the wiser
course. We focus on the economic, fundamental and
technical dynamics of investing and keep an eye on
relevant political developments. If your wealth goals
or your personal appetite for risk hasn’t changed, then
staying near your strategic asset allocation is your best
long-term decision. Your First Republic team is available
to address any questions or concerns you may have. It’s a
privilege to serve you®
UNEVEN RESULTS FOR COMMODITIES
Prices for specific commodities sharply diverged in the
quarter. Prices for natural gas dropped by double-digits
since winter demand was low given warm temperatures
in many areas of the country. This leaves natural gas
supplies high until the summer cooling season begins.
Raw sugar prices also dropped significantly through
changes in supply. Brazil is expected to produce a bumper
crop in the 2017 growing season. Prices for precious
metals (gold, silver) rose, recovering from a strong sell-off
near year end. Modest demand for precious metals also
came from investors seeking safe havens from Europe’s
political risks.
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FINANCIAL MAR K ET R ETUR NS
annualized
U.S. Equity
1 Year
3 Year
5 Year
5.2%
19.9%
10.6%
12.2%
8.1%
10.1%
22.9%
13.4%
15.3%
10.5%
S&P 500 TR Index
6.1%
17.2%
10.4%
13.3%
7.5%
Russell 1000 Index
6.0%
17.4%
10.0%
13.3%
7.6%
Russell 1000 Growth Index
8.9%
15.8%
11.3%
13.3%
9.1%
Russell 1000 Value Index
3.3%
19.2%
8.7%
13.1%
5.9%
Russell Mid Cap Index
5.1%
17.0%
8.5%
13.1%
7.9%
Russell Mid Cap Growth Index
6.9%
14.1%
7.9%
12.0%
8.1%
Russell Mid Cap Value Index
3.8%
19.8%
8.9%
14.1%
7.5%
Russell 2000 Index
2.5%
26.2%
7.2%
12.4%
7.1%
Russell 2000 Growth Index
5.3%
23.0%
6.7%
12.1%
8.1%
Russell 2000 Value Index
-0.1%
29.4%
7.6%
12.5%
6.1%
MSCI US REIT Index GR
1.0%
3.2%
10.1%
9.8%
4.7%
-2.3%
8.7%
-13.9%
-9.5%
-6.2%
3.9%
28.3%
-5.2%
2.6%
7.2%
Dow Jones Industrial Average
NASDAQ Composite Index
Bloomberg Commodity Index
Alerian MLP
Q1 2017
10 Year
annualized
International Equity
Q1 2017
1 Year
3 Year
5 Year
10 Year
MSCI EAFE Index ($USD, net)
7.2%
11.7%
0.5%
5.8%
1.1%
MSCI AC World Index ($USD, net)
6.9%
15.0%
5.1%
8.4%
4.0%
MSCI AC World Ex US Index ($USD, net)
7.9%
13.1%
0.6%
4.4%
1.4%
MSCI Emerging Markets Index ($USD, net)
11.4%
17.2%
1.2%
0.8%
2.7%
MSCI BRIC Index ($USD, net)
11.6%
23.4%
2.7%
0.4%
2.1%
annualized
Fixed Income
Q1 2017
1 Year
3 Year
5 Year
10 Year
Bloomberg Barclays US Treasury 1– 3 Year Index
0.3%
0.2%
0.7%
0.6%
2.0%
Bloomberg Barclays US Treasury 5 –10 Year Index
0.9%
-1.9%
2.8%
2.0%
4.9%
Bloomberg Barclays US Long Treasury Index
1.4%
-5.0%
5.8%
4.0%
6.7%
Bloomberg Barclays US Treasury US TIPS Index
1.3%
1.5%
2.0%
1.0%
4.2%
Bloomberg Barclays US Govt/Credit Intermediate Index
0.8%
0.4%
2.0%
1.9%
3.8%
BofAML Municipals 1–12 Year Index
1.4%
0.2%
2.1%
2.1%
3.8%
Bloomberg Barclays US Corporate High Yield Index
2.7%
16.4%
4.6%
6.8%
7.5%
BofAML Preferred Stock Fixed Rate Index
5.2%
5.9%
7.5%
6.5%
3.1%
JPMorgan GBI EM Global Diversified Index
6.5%
5.5%
-2.7%
-1.6%
4.1%
Source: Morningstar
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INDEX DEFINITIONS
MSCI US REIT Index: is a free float-adjusted market
capitalization index that is comprised of equity REITs.
The index is based on MSCI USA Investable Market
Index (IMI) which captures large, mid and small cap
securities
U.S. EQUITY
Dow Jones Industrial Average: is a price-weighted
average of 30 actively traded blue-chip U.S. stocks
NASDAQ Composite Index: is a market capitalization
index of approximately 3,000 common equities listed on
the NASDAQ exchange
Bloomberg Commodity Index: tracks the futures
contracts on over 20 different physical commodities on
the commodity markets. The Index is weighted to
account for economic significance and market.
S&P 500 TR Index: is a type of equity index that tracks
both the capital gains of the equities in the S&P 500 and
assumes any cash distributions (dividends) are reinvested
back into the index
Alerian MLP: is a composite of the 50 most prominent
energy Master Limited Partnerships (MLPs) that
provides investors with an unbiased, comprehensive
benchmark for the asset class
Russell 1000 Index®: measures the performance of the
1,000 largest companies in the Russell 3000
Russell 1000 Growth Index®: measures the
performance of those Russell 1000 companies with
higher price-to-book ratios and higher forecasted growth
values
FTSE NAREIT All REITs: is a comprehensive family
of REIT-focused indexes that span the commercial real
estate industry, providing market participants with a
range of tools to benchmark and analyse exposure to real
estate across the U.S. economy at both a broad industrywide level and on a sector-by-sector basis
Russell 1000 Value Index®: measures the performance
of those Russell 1000 companies with lower price-tobook ratios and lower forecasted growth values
INTERNATIONAL EQUITY
MSCI EAFE Index: is a free float-adjusted market
capitalization index that is designed to measure the
equity market performance of developed markets,
excluding the US & Canada
Russell Mid Cap Index®: measures the performance of
the 800 smallest companies in the Russell 1000 index
Russell Mid Cap Growth Index®: measures the
performance of those Russell Midcap companies with
higher price-to-book ratios and higher forecasted growth
values. The stocks are also members of the Russell 1000
Growth index
MSCI AC World Index: is a free float-adjusted market
capitalization weighted index that is designed to measure
the equity market performance of developed and
emerging markets
Russell Mid Cap Value Index®: measures the
performance of those Russell Midcap companies
with lower price-to-book and lower forecasted growth
values. The stocks are also members of the Russell 1000
Value index
MSCI AC World Ex US Index: captures large and
midcap representation across 22 of 23 developed
marketing countries (excluding the US) and 23
Emerging Markets countries
MSCI Emerging Markets Index: is a free float-adjusted
market capitalization index that is designed to
measure equity market performance in the global
emerging markets
Russell 2000 Index®: measures the performance of the
2,000 largest companies in the Russell 3000 index
Russell 2000 Growth Index®: measures the performance
of those Russell 2000 companies with higher price-to-book
ratios and higher forecasted growth values
MSCI BRIC Index: is a free float-adjusted market
capitalization weighted index that is designed to measure
the equity market performance across the following 4
emerging market country indexes: Brazil, Russia, India
and China
Russell 2000 Value Index®: measures the performance
of those Russell 2000 companies with lower price-tobook ratios and lower forecasted growth values
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INDEX DEFINITIONS
Barclays US Corporate High Yield Index:
measures the USD-denominated, high-yield, fixed-rate
corporate bond market. Securities are classified as high
yield if the middle rating of Moody’s, Fitch and S&P is
Ba1/BB+/BB+ or below. Bonds from issues with an
emerging markets country of risk, based on Barclay’s
EM country definition, are excluded
FIXED INCOME
Barclays US Treasury 1– 3 Year Index: measures
the performance of U.S. Treasury securities that have a
remaining maturity of at least one year and less than
three years
Barclays US Treasury 5 –10 Year Index: measures
the performance of U.S. Treasury securities that have
a remaining maturing of at least five years and less than
10 years
BofAML Municipals 1–12 Year Index: is a subset of
the BofAML U.S. Municipal Securities Index and
includes all securities with a remaining term to final
maturity greater than or equal to one year and less than
12 years and rated AAA through AA3, inclusive
Barclays US Long Treasury Index: includes all publicly
issued, U.S. Treasury securities that have a remaining
maturity of 10 or more years, are rated investment grade,
and have $250 million or more of outstanding face value
BofAML Preferred Stock Fixed Rate Index: this index
is designed to replicate the total return of a diversified
group of investment-grade preferred securities
Barclays US Treasury US TIPS Index: the index
includes all publicly issued U.S. Treasury inflationprotected securities that have at least one year remaining
to maturity, are rated investment grade, and have $250
million or more of outstanding face value
JPMorgan GBI EM Global Diversified Index: is an
investable benchmark that includes only those countries
that are directly accessible by most of the international
investor base. This index exclude countries with explicit
capital controls, but does not factor in regulatory / tax
hurdles in assessing eligibility
Barclays US Govt/Credit Intermediate Index: the
index measures the performance of the USDdenominated U.S. Treasuries, government-related and
investment grade U.S. corporate securities that have a
remaining maturity of greater than one year and less
than ten years
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DISCLOSUR E
First Republic Private Wealth Management encompasses First Republic Investment Management, Inc. (“FRIM”), an
SEC-registered investment advisor, First Republic Securities Company, LLC (“FRSC”), Member FINRA/SIPC, First
Republic Trust Company (“FRTC”) and First Republic Trust Company of Delaware LLC (“FRTC-DE”). FRIM,
FRSC, and FRTC-DE are wholly owned subsidiaries of First Republic Bank. FRTC is a division of First Republic
Bank. Investment advisory services are provided through FRIM. Securities brokerage services are provided through
FRSC. Trust and fiduciary services are provided through FRTC and FRTC-DE.
This document is for information purposes only and is not intended as an offer or solicitation, or as the basis for any
contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a
consequence of any information contained herein.
All analyses and projections depicted herein are for illustration only, and are not intended to be representations of
performance or expected results. The results achieved by individual clients will vary and will depend on a number of
factors including prevailing dividend yields, market liquidity, interest rate levels, market volatilities, and the client’s
expressed return and risk parameters at the time the service is initiated and during the term. Past performance is not a
guarantee of future results. Investors should seek financial advice regarding the appropriateness of investing in any
securities, other investment or investment strategies discussed or recommended in this report and should understand
that statements regarding future prospects may not be realized.
Investors cannot invest directly in an index. The indexes referred to do not reflect management fees and transaction
costs that are associated with some investments. Although information in this document has been obtained from sources
believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as
such. This document may not be reproduced or circulated without our written authority.
Investment, Insurance and Advisory products and services are not deposits of, or guaranteed by, any bank,
are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency, entity or person and are subject to investment risks including the possible loss of principal.
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