Quarterly Market Update - Q1 2017 By: Gabriel PotterMBA, AIFA® 2017.04.06

Key news stories

The first quarter of 2017 was filled with events with the potential to change our economic and investment environment.  We experienced the election of a new president, the second Federal Reserve interest rate increase in four months, new unemployment lows (4.7%), significant M&A activity, huge setbacks for retailers, delay (and potential withdrawal) of the fiduciary rule, official withdrawal from the Trans-Pacific Partnership, and threats of tariffs and adjustment taxes.  The markets responded to most of these stories with optimism, breaking 21,000 in the Dow Jones Industrial Average before deflating somewhat in March.


Generally speaking, growth stocks beat value stocks and large cap stocks beat small cap stocks in the first quarter of 2017.  There are a few reasons for this outcome.  For instance, large cap companies get a higher proportion of their revenue (about 1/3rd) outside of United States.  In comparison, about 85% of Russell 2000 company revenue comes from the United States.  So, when international markets are outperforming, it provides a tailwind to larger companies.  Growth companies on anticipation of expansion, growth potential, and future revenues coincided more with the zeitgeist – the Trump rally - which opened the quarter.  The market outperformance was, in fact, highest where valuations are most stretched for growth stocks.

All index performance values are for previous quarter.

  • US Large Cap Growth - Russell 1000 Growth:  8.91%
  • US Large Cap Value - Russell 1000 Value:  3.27%
  • US Small Cap Growth - Russell 2000 Growth:  5.35%
  • US Small Cap Value - Russell 2000 Value:  -0.13%
  • Developed International Markets – MSCI EAFE:  7.25%
  • Emerging Markets - MSCI EM:  11.45%



Core US bonds plugged along earning a modest, but fair, return level while core international bonds outperformed.  As equity markets moved forward, faith in investment grade credit and high-yield credit also excelled.  However, there was one key oddity:  the performance of duration.  The past three months were advantageous for higher credit; 1-5 year bonds made 0.57%, 5-10 year bonds made 1.18%, and so on.  The outperformance of long bonds was notable given the Federal Reserve’s increase of interest rates in March, which should stifle long duration bond performance.  The higher yields were enough to offset the loss of bond premiums in long bonds.

All index performance values are for previous quarter.

  • Barclays Capital US Aggregate Bond:  0.82%
  • Barclays Capital US Intermediate Credit:  1.14%
  • Barclays Capital US Government:  0.68%
  • Barclays Capital US Gov’t/Credit Long Duration:  1.58%
  • Bank of America/Merrill Lynch High Yield Master II:  2.71%
  • Citi World Government Bond Index (non USD):  2.02%


Investments which are used to offset different market forces, like inflation risk and market risk, were treading water in the first quarter.  In terms of raw performance, some elements of the real estate market (REITs) were generally positive during the first quarter, despite a rough March.  One caveat:  real estate indices which include proxy investments like real estate operating companies (REOCs) underperformed, so some real estate indices are actually negative (e.g. DJ US Select REIT).  There was great divergence in different elements in the commodities market.  As you may have noticed in the news, oil prices dropped a touch but natural gas prices plummeted as inventories strengthened and the case for expanded drilling and supply heightened.  On the plus side, emerging market raw materials like precious and industrial metals were positive (some over 10%) in the quarter.

  • Real Estate - FTSE NAREIT All REITs:  2.55%
  • Commodities – Morningstar Long Only Commodity TR:  -4.44%
  • Inflation – Barclays US Treasury TIPS:  1.26%
  • Hedge Funds – Deutsche Bank Hedge Fund TR USD:  0.95%






Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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