The first quarter ended with more questions than answers, especially in the month of March. Is the administration going to be able to implement promises made during the campaign? How aggressive is the Fed going to be? A mixed bag of economic data along with a series of false starts in Washington has many investors scratching their heads. Treasuries have rallied as the "Trump Trade" has started to lose its post-election momentum. The market seemed priced for perfection looking ahead, so we are not surprised and somewhat relieved to see a pause.
 

Even with the weak finish to the quarter, the Dow Jones Industrial Average posted a +5.19% return but had a -0.60% return for the month of March. The S&P 500, including dividends, posted a quarterly return of +6.07%. The NASDAQ 100 was up +12.09% for the quarter as technology continued to rally on growth enthusiasm and the resurgence of the FANG group. The Russell 2000 small-cap index, not surprisingly, was one of the weaker-performing benchmarks, posting a +2.47% return for the quarter. From a sector perspective, technology and health care were up +12.88% and +8.39% respectively. Energy was the weakest sector returning -6.79%. The Russell 1000 Growth Index was up a respectable +8.91% and outperformed the Russell 1000 Value Index, which had a return of +3.27% for the quarter. Economic data was mixed but there was enough reason for the Fed to raise interest rates in March by 25bps. On the employment front, January generated 227,000 in job gains, February came in at 235,000 jobs and March came in at a weaker 98,000. Weather was to blame for the poor March read but it will be a closely watched indicator looking ahead. The U.S. dollar weakened versus many of its counterparts, as there has been renewed enthusiasm in Europe and a loss of momentum regarding the "Trump Trade." As we write, Q1 earnings are being reported and expectations are for a 9% gain year-over-year, which should bring some justification to current equity valuations.
 

Across the pond, the performance of some of the major foreign indices were in line with or better than those of the U.S. The MSCI EAFE index was up +7.25% for the quarter and the MSCI Europe Index returned +7.44%. Emerging markets posted an impressive +11.44% quarterly return as stronger foreign currencies and cheaper valuations attracted investors.
 

Regarding fixed income Treasury yields paused and had a hard time sustaining their level above 2.50% at the 10-year level. Just when it seemed yields might be headed higher, bidders came in looking for bargains. The 10-year yield finished the quarter at around 2.40% after hitting a high of around 2.60%. Most global sovereign bonds, particularly emerging market debt, saw strong positive performance. The JP Morgan Emerging Markets Bond Index returned +3.97% that was aided by positive currency impact and improved risk appetite by investors. High-yield fixed income performed well, with the Bloomberg Barclays U.S. Corporate High Yield Index returning +2.70% for the quarter; this performance was in line with other riskier sectors of the bond market.

 

THOUGHTS ON ASSET ALLOCATION

 

The Trust Investment Committee (TIC) has largely remained quiet in recent meetings, taking comfort in our current positioning within our portfolios. We modestly tilted our allocations towards a scenario of more growth late last year with the understanding that the adjustment would command patience. It’s unrealistic to assume the strength of the post-election rally would continue at its vigorous pace. Setbacks and market consolidation are inevitable as markets desperately try to price in the moves coming from Washington. We are keenly aware of the geopolitical issues coming out of North Korea and Syria. With market volatility stubbornly low, we believe the market is ignoring the rhetoric overseas which could be a huge "tail risk" event. Overall, we have a sufficient amount of offense in our portfolios to capitalize on any pro-growth initiatives by having healthy allocations of mid- and small-cap exposure. In the event volatility returns, our slightly higher cash target and alternative exposures (merger arbitrage and long/short) should minimize the downside for you.
 

Valuations of the broad S&P 500 index are at 17.5x forward earnings, which is comfortably above its 10- and 15-year average. Several other market indices show the same pattern. With elevated market valuations and complacent volatility levels, it is an ideal time to be more mindful of risk, not less. As active managers, we have the luxury of screening for investment managers that possess fundamental attributes of high quality, lower long-term risk and downside protection, all of which are blatantly ignored by the most popular of passive ETF investment vehicles. Clients who have been with us for years are intently aware of our obsession with risk mitigation and put a premium on our expertise when it comes to principal protection. Our investment approach continuously focuses on managers that are designed to capture a significant portion of market upside while protecting your capital during the inevitable market downturns.