Download The First Quarter In Review

Q1 2017 MARKETS REVIEW
Highlights
Following an initial positive
reaction to the surprise
election of Donald Trump as
President of the United States
investors seem to be taking a
pause. The focus going forward
will be on how successful the
new administration is in
implementing its policy
agenda.
Overview
Global stock markets started the year strong, extending their post-presidential election
rally into the first quarter of 2017. Investor’s expectations for corporate tax cuts,
infrastructure spending and regulatory reform, continued firmness in economic data, and
rebounding corporate earnings helped to fuel the market rally. However, investors took a
pause in March as they questioned the ability of President Trump and the Republican Party
to implement its policy agenda in light of an unsuccessful attempt to repeal the Affordable
Care Act.
Arguably the biggest non-event of the quarter was the decision by the Federal Reserve
(“Fed”) to raise the federal fund rate by 0.25 percent in March. The market anticipated a
hike given an unemployment rate of 4.5 percent, inflation close to the Fed’s 2 percent
target, and the passage of time since the Federal Open Markets Committee (FOMC) held
off on raising rates at their September and November meetings so as not to influence the
election. Following the March rate increase, the FOMC set expectations for just two more
rate hikes before year end instead of three causing both the 10-year yield and the U.S.
dollar to fall.
U.S. companies delivered another solid quarter of growth. Fourth quarter 2016 earnings
reports showed nearly two-thirds of companies on the S&P 500 beating their average
earnings estimates and more than half of companies beat their average sales estimates.
Aided by stabilization in the energy sector, the quarterly blended earnings growth rate for
the S&P 500 came in at 4.9 percent, solidly higher than the forecasted of 3.1 percent. First
quarter 2017 earnings are expected to be strong. Consensus forecasts suggest an earnings
growth rate of 9.1%.
Consumer Confidence
140
Sources: Bloomberg, Conference Board
As of: 3/31/2017
Consumer confidence, as
measured by the Conference
Board’s U.S. consumer
sentiment index, hit its highest
level in 16 years. Will economic
growth fueled by increased
consumer spending follow?
120
100
80
60
40
20
Consumer Confidence - Conference Board :: 125.6
'07
'08
The U.S. Economy
'09
'10
'11
'12
'13
'14
'15
'16
0
'17
During the first quarter, the U.S. Department of Commerce reported that real gross
domestic product (GDP) expanded at a 2.1 percent annual rate during the fourth quarter
of 2016. Consumer and government spending bolstered economic growth while net
exports detracted from growth. “Soft data” in the form of economic growth surveys
continue to suggest solid economic momentum. The Institute of Supply Management (ISM)
surveys of manufacturing and services each continue to be well above levels that indicate a
growing economy. Consumer and business confidence also remain strong providing
optimism for the future. However, there does appear to be some disconnect between
sentiment and the “hard data” in areas such as industrial production. How the economy
evolves going forward hinges on how well the real economy “catches up” with sentiment.
Q1 2017 MARKETS REVIEW
U.S. hiring levels rebounded nicely in the first quarter with job gains occurring in
construction, private educational services, manufacturing, health care, and mining. The
unemployment rate fell to 4.5 percent by quarter end as the level of unemployment claims
continues to trend downward.
Change in Total Non-Farm Payrolls
As of: February 2017
Sources: St. Louis Fed, U.S. Bureau of Labor Statistics
Employment growth has
slowed somewhat, but remains
consistent with an economic
expansion.
400
350
300
250
200
150
100
50
Change in Thousands of Persons
Highlights
0
Jan-15
May-15
Sep-15
Jan-16
May-16
Sep-16
Jan-17
Inflation & Monetary Policy
The Fed moved to raise shortterm policy interest rates in
March and signaled just two
more rate hikes in 2017 rather
than three the market was
beginning to expect.
Inflation measures rose sharply as energy prices rebounded off post-recession lows logged
in early 2016. The Consumer Price Index (CPI) annual growth rate came in at 2.7 percent in
February, the highest inflation rate since early 2012. Core CPI, which excludes the more
volatile food and energy components, rose at a 2.2 percent annual rate for the same period.
These numbers suggest that deflation risk is abated and inflation is not increasing as
runaway rates for now.
As noted above, the Fed moved to raise short-term policy interest rates in March and
signaled just two more rate hikes in 2017 rather than three the market was beginning to
expect. Low unemployment and signs of wage pressures along with an uptick in inflation
rates continue to tilt the Fed to a slightly more hawkish stance. The Fed also made it clear
that it will monitor the actual execution of President Trump’s policy plans rather than preemptively act to head off inflationary pressures that could result from those plans.
The Global Economy
Economic growth was broadly
positive across the globe in the
first quarter.
Global economic growth continued positive for the quarter aided by continued monetary
stimulus from major central banks such as the Fed, the European Central Bank, Bank of
Japan and Bank of England. Economic data from Europe was largely positive with the Markit
Purchasing Managers index reaching a near-term high of 56.7 in March. The European
Central Bank upgraded its growth and inflation forecasts while indicating that it expects to
continue to provide stimulus until at least the end of 2017. Political worries receded as
European elections to date rejected anti-European Union politicians, though all eyes remain
focused on the upcoming French election. The United Kingdom continued down the path to
exiting the European Union as Prime Minister Theresa May triggering Article 50 of the
Lisbon Treaty in March officially beginning the two-year exit process. Japan is now firmly out
of its recent recession delivering a annual GDP growth rate of only 1.6 percent in the fourth
quarter. The Japanese yen appreciated slightly during the quarter. In China, stocks enjoyed
a strong quarter driven by increased investment spending and factory output. Improved
investor sentiment along with Chinese central bank moves to raise rates stabilized the
Chinese yuan and flattened capital outflows. Ongoing restrictions on the property market
and limits on capital outflows may also be shifting investors towards equities.
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Q1 2017 MARKETS REVIEW
Highlights
U.S. Stocks
U.S. stocks delivered solid gains during the quarter, continuing their post-election ascent.
The prospect for fiscal stimulus and a pro-investment agenda from President-elect Trump
continued to support stock prices although investors took a pause late quarter as they
questioned the ability of the new administration to implement its policy agenda.
S&P 500 -Trailing Twelve Months
As of: 3/31/2017
Sources: Bloomberg
2600
2500
2400
2300
2200
2100
2000
1900
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Market Cap & Style
After trailing value stocks in
2016, growth stocks
outperformed during the first
quarter.
After trailing value stocks in 2016, growth stocks outperformed during the first quarter.
Small cap stocks delivered more than 26 percent returns for the trailing year supported by
the possibility of rapid economic growth and Trump administration trade restrictions.
Asset Class
MTD (%) QTD (%) YTD (%) 1 Year (%)
Benchmark
U.S. Large Cap Stocks
0.12
6.07
6.07
17.17
S&P 500 Composite
U.S. Mid Cap Stocks
-0.16
5.15
5.15
17.03
Russell Mid Cap
U.S. Small Cap Stocks
0.13
2.47
2.47
26.22
Russell 2000
U.S. Value Stocks
-1.01
2.99
2.99
19.97
Russell 3000 Value
U.S. Growth Stocks
1.16
8.63
8.63
16.27
Russell 3000 Growth
Source: Morningstar Direct℠ as of 3/31/2017
Sector
Stock returns in the information technology sector led during the first quarter, driven by
expectations for increased capital expenditures. Energy sector stocks lagged the market as
crude oil prices fell with the supply of oil outpacing demand.
S&P 500 Index Sectors
Returns in the information
technology sector stocks led
performance during the first
quarter driven by expectations
for increased capital
expenditures
Weights (%)
Returns (%)
C onsumer Di scr eti ona r y
12.17
8.44
C onsumer Sta pl es
9.36
6.35
Ener g y
6.97
-6.61
Fi na nci a l s
14.68
2.51
Hea l th C a r e
13.86
8.29
Industr i a l s
10.21
4.44
Infor ma ti on Technol og y
21.46
12.46
M a ter i a l s
2.86
5.89
R ea l Esta te
2.82
3.59
Tel ecommuni ca ti on Ser vi ces
2.49
-4.03
Uti l i ti es
3.13
6.40
Attr i buti on Tota l
6.02
Source: Morningstar Direct℠ as of 3/31/2017
Past performance does not guaranteed future results.
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Q1 2017 MARKETS REVIEW
Highlights
Improving economic conditions
and a weakening U.S. dollar
helped international stocks to
a strong quarter.
International Stocks
Improving economic conditions and a weakening U.S. dollar helped international stocks to
a strong quarter. The U.S. dollar pulled back during the quarter on news that the Fed may
not be as aggressive with policy moves in 2017 and on concerns with the new U.S.
administration’s ability to implement its policy agenda.
Emerging market stocks delivered stellar quarterly results due to generally stronger
economic data from major global economies. Emerging markets also appear to be
wondering whether President Trump’s anti-globalization rhetoric is overblown.
MTD (%) QTD (%)
Asset Class
YTD (%)
1 Year (%)
Developed Market Stocks (USD)
2.75
7.25
7.25
11.67
MSCI EAFE (net)
Developed Market Stocks (LCL)
2.41
4.71
4.71
18.00
MSCI EAFE (net) LCL
+0.34
+2.53
+2.53
-6.33
Emerging Market Stocks (USD)
2.52
11.45
11.45
17.22
MSCI EM (net)
European Stocks (USD)
4.02
7.44
7.44
9.76
MSCI Europe (net)
Japanese Stocks (USD)
-0.37
4.49
4.49
14.44
MSCI Japan (net)
Pacific Country Stocks (USD)
2.58
11.76
11.76
18.39
MSCI Pacific Ex Japan (net)
Currency Impact
Source: Morningstar Direct℠ as of 3/31/17
Fixed Income
After hitting all-time lows in July,
U.S. Treasury yields have risen
sharply following last year’s
presidential election only to take
a pause in mid-March as the Fed
reset expectations for future
rate hikes and concern rose over
the new administration’s ability
to implement its policy agenda.
Benchmark
For most of the quarter, the yield on the benchmark 10-year U.S. Treasury bond continued
its slow climb off the multi-year low hit in July of 2016. By mid-March, the 10-year
Treasury yield hit 2.60 percent. However, the FOMC targeting fewer rate hikes in 2017
along with concerns over the new administration’s ability to implement its policy agenda
drove the 10-year Treasury yield down to 2.40 percent by quarter end.
Although the Fed raised interest rates another 25 basis points (0.25 percent) in March and
signaled additional hikes in 2017, the prospect of continued economic growth and the
potential that Trump administration policies could accelerate growth and inflation
triggered the sharpest moves. Going forward, we expect the market to pay close attention
to the Republican President’s and Congress’s ability to deliver on those policies.
10-Year U.S. Treasury Yield -Trailing Twelve Months
As of: 3/31/2017
2.7
Sources: St. Louis Fed, Board of Governors of the Federal Reserve System (US)
2.5
2.3
2.1
1.9
1.7
1.5
1.3
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Past performance does not guaranteed future results.
Feb
Mar
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Q1 2017 MARKETS REVIEW
Highlights
Region
International and emerging markets bonds delivered positive returns during the quarter
with the weakening U.S. dollar providing significant tailwinds to non-U.S. bond returns.
Emerging market bonds were up nearly 4 percent benefiting from this U.S. dollar tailwind
and investor demand for the higher yield they delivered.
U.S. high yield bonds delivered
strong returns as bonds issued
by energy companies lost
ground due to falling oil prices.
Credit
Investment-grade and high-yield corporate bond prices both moved higher during the
quarter. Solid economic data served to bolster growth expectations and increase the
demand for developed and emerging market credit. Energy company bonds lost ground as
over supply in the oil sector pushed the price of oil down.
Duration
Interest rates ended the quarter down slightly at 2.40 percent after reaching 2.60 percent
in mid-March. The stability of interest rates during the quarter made bond yields the
primary driver of performance with the higher yielding Barclays U.S. Treasury 20+ Year
index outperforming the intermediate duration Barclays U.S. Aggregate Bond index.
Asset Class
MTD (%) QTD (%)
YTD (%)
1 Year (%)
Benchmark
U.S. Bonds
-0.05
0.82
0.82
0.44
Barclays US Agg Bond
Developed Market Bonds
0.30
2.48
2.48
-3.93
Barclays Gbl Agg Ex US
Emerging Market Bonds
0.35
3.90
3.90
8.82
JPM EMBI Global
U.S. Corporate Bonds
-0.23
1.22
1.22
3.31
Barclays US Corp IG
U.S. High Yield Corporate Bonds
-0.22
2.70
2.70
16.39
Barclays US Corp High Yield
U.S. TIPS
-0.05
1.26
1.26
1.48
Barclays US Treasury US TIPS
U.S. Long Duration Treasuries
-0.59
1.41
1.41
-5.18
Barclays US Treasury 20+ Yr
Source: Morningstar Direct℠ as of 3/31/17
Real Estate & Commodities
Gold rebounded sharply in the
first quarter as investor
expectations for the U.S
economy settled onto a more
realistic path.
Real Estate Investment Trusts (REITs) gained 3.22 percent for the quarter. Solid economic
data stoked demand from investors, who look for yield and the potential for future growth.
Falling oil prices, due to unexpected excess supply and concerns over OPEC’s ability to
hold member countries to production quotas, dragged commodities down for the quarter.
Gold rebounded sharply in the first quarter as investor expectations for the U.S economy
settled onto a more realistic path.
Asset Class
YTD (%)
1 Year (%)
U.S. Real Estate
MTD (%) QTD (%)
-1.35
3.22
3.22
5.58
Benchmark
DJ US Real Estate
Commodities
-2.66
-2.33
-2.33
8.71
Bloomberg Commodity
Gold
-0.43
8.22
8.22
0.10
Bloomberg Sub Gold
Source: Morningstar Direct℠ as of 3/31/17
Past performance does not guaranteed future results.
5
Q1 2017 MARKETS REVIEW
Conclusion
The political realities of governing became apparent for President Trump during the first quarter. While the situation might
not be as bad as some critics suggest, the market often reacts to perceptions. This shift in perception led to some reversals
versus the fourth quarter of 2016 even though the post-election confidence boost trend continued through the first quarter.
Consumers, small businesses and CEO’s all seemed to ratchet up their assessment of the economy and its prospects. In
general, developed and emerging international stocks led during the quarter while other segments, such as U.S. small cap
stocks, lagged the broader market. We note that “hard data” from the real economy still lags the “soft” data from surveys.
Even so, relative to recent previous years’ first quarters, 2017 was solid.
We also observe that a synchronized global upturn remains somewhat hidden behind the attention given the new U.S.
administration and populist trends in Europe. China, Australia, the Eurozone, the United Kingdom and Canada all showed
signs of rising activity. Global trade volumes appear to be recovering. Importantly, this is occurring as deflationary pressures
are abating. This improved nominal growth is promising for credit markets, corporate profits and eventual wage gains.
As a result, the markets seem to have a reservoir of support with or without dramatic policies from the Trump administration.
Of course, there are always risks present in the financial markets. Auto sales cooled during the quarter. U.S. credit growth is
soft. Ironically, the prospect of more favorable corporate tax rules in the future may be leading some businesses to “wait and
see” when it comes to capital spending. Despite these risks, we are watching a economic momentum continue to accelerate.
Patience and diversification go hand in hand as different investments come into and out of favor. For the first quarter of 2017
the strength in international markets reminded us of the benefits of broad diversification over time. Market and sector
leaders rotate frequently. We believe that investors who stick with a disciplined plan are best positioned to capture the
benefits of shifting trends in the markets.
The performance data cited in this document represents past performance and should not be considered indicative of future
results. Current performance may be lower or higher than return data quoted herein. Investors should carefully consider
investment objectives, risks, charges and expenses. These materials and the platform of investments made available by
MassMutual are offered without regard to the individualized needs of any plan, its participants, or beneficiaries. These materials
are not intended as impartial investment advice or to give advice in a fiduciary capacity to any plan. This and other important
information about the platform of investments made available by MassMutual is contained in fund prospectuses and summary
prospectuses, which can be obtained from www.massmutualfunds.com and should be read carefully before investing. These
investments are not FDIC-insured, may lose value and are not guaranteed by a bank or other financial institution.
The information provided is the opinion of MassMutual Retirement Services Investments Marketing as of 4/17/2017 and is
subject to change without notice. It is not to be construed as tax, legal or investment advice. Past performance does not
guarantee future results.
4/17
RS-41520-01
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