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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. 2 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. 3 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 4 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 6