First-Quarter Market Update & Outlook

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BKD’s Top Three

Only have a few minutes to check in on the economy and state of the markets? Scan the takeaways from this Q1 market update.

  • Expected policy changes from the Trump administration have had a greater impact on financial markets than actual changes.
  • A stock market correction is likely at some point in the year, as this is the “nature of the beast.”
  • There are several global events on the horizon that may cause short-term market turmoil.

For more details, read Jeff Layman’s expanded market insight and quarterly commentary below.

The global economy and markets performed well during the first quarter of 2017. U.S. stocks surged to a record high while trading for more than 100 straight days without a 1 percent or greater decline. And after a weak 2016, foreign stocks delivered the best return of any major asset class. Most economic indicators prove the U.S. economy is doing well overall: fourth-quarter economic growth was 2.1 percent, corporate profits increased, unemployment is at its lowest since 1973 and consumer and business sentiment has risen to the highest level in 10 years.

Both U.S. and foreign markets benefited from improving economic trends, increased profits and optimism regarding the Trump administration’s proposed policies. The proof comes from the current economic boom—it’s the third-longest in history at 93 months.

Political Impact on Financial Markets
Investors have reacted positively to the prospect of policy changes such as lower corporate and individual tax rates, decreased regulation and increased infrastructure spending as they are expected to spur faster economic growth. With the failure to pass health care reform in March, anticipated policy changes may still occur, but the process likely will be slow and impact delayed. Given the major rally since the election, this is a key risk factor for the stock market ahead.

Potential for a Stock Market Correction
A stock market correction is likely this year. The market is cyclical, and this type of volatility is routine and can be expected over time. Stocks have experienced a 5 percent decline once every seven months and a 10 percent correction every 26 months, on average.1 However, significant declines of 20 percent or more, “bear markets,” are less common and tend to coincide with economic recession. There are currently very few signs of recession, so a more significant drop in stock prices seems unlikely.

What’s to Come in 2017
Nobel Prize winning economist Harry Markowitz once called diversification “the only free lunch in finance,” and it is as important now as ever. Balanced portfolios are off to a great start this year, with U.S. and international stocks delivering gains. Bonds and alternative investments also have made positive contributions and offer a crucial risk management benefit. After several years of U.S. stock market outperformance, odds are that other asset classes will lead going forward.

There are several events on the horizon that may cause short-term market turmoil. Great Britain recently began the “Brexit” process, the country’s exit from the European Union. This has never been done before and could have unexpected consequences. The French presidential election takes place in May and, depending on the result, that country could move in a new and uncertain direction as well. In the U.S., the ability of the Trump administration to avoid political gridlock will be tested. Without policy change, the post-election rally may be in jeopardy. Each of these events has the potential to produce investor angst and market volatility.

Fortunately, the global economy is doing well, which should limit downside. While we expect some bumps along the way, 2017 is shaping up to be a reasonably good year for investors.

1Source: Investech Research

Jeffrey A. Layman, CFA®
Chief Investment Officer

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BKD Wealth Advisors, LLC is an SEC registered investment adviser offering wealth management services for affluent families and investment consulting services for institutional clients and is a wholly owned subsidiary of BKD, LLP. The views are as of the date of this publication and are subject to change. Different types of investments involve varying risks, and it should not be assumed that future performance of any investment or investment strategy or any noninvestment-related content will equal historical performance level(s), be suitable for your individual situation or prove successful. A copy of BKD Wealth Advisors' current written disclosure statement is available upon request.

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