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2017 | March Risk Odometer

Equity Market Risk Odometer*

March 2017 Monthly Summary

Quick Take:

  • Healthcare bill fails and Federal Reserve raises rates. US stock market takes a pause and international stock markets continue to outperform.

March Overview

  • Healthcare bill fails and US Federal Reserve raises rates by 0.25%
  • Global inflation continues to increase and forward looking global growth indicators continue to look red-hot.
  • US equity markets take a pause but international markets continue their outperformance

The month of March was dominated by two main events, the failure of the healthcare bill and the raising of interest rates by the US Federal Reserve. Neither of these events were able to have a significant impact, though, on US equity or bond markets, as the respective benchmarks finished predominately unchanged. Last year’s post-election outperformers (small caps, financials, materials, energy) continue to give up ground versus post-election underperformers (international stocks, technology, health care) as optimism and euphoria regarding the new administration fade and reality sets in that campaign promises and results can be very different.

The jury is still out as to whether the new administration can fulfill their campaign objectives. The failure of the healthcare bill was a big blow to the Trump team because it has for the first time, began to make investors question how effective Trump will be in delivering on many lofty objectives, which the markets were expecting to happen given the Republican control of Congress. The new administration is now expected to change their focus to tax reform, which will be no easy task. House Speaker, Paul Ryan, reiterated this following the healthcare bill defeat, warning the failure of the bill “does make tax reform more difficult”.

The second big event of the month was the raising of interest rates by the US Federal Reserve. They raised their target rate by 0.25% to a range of 0.75% - 1.0%. The rate increase is the second increase in the past 3 months, last raising them in December 2016. Much of the incredible appreciation of the US stock market since the lows in 2009 have been on the back of historically low interest rates, so increasing rates for a second time in the past 3 months could be the beginning of a significant shift. This shift had the markets worried going into the Fed’s meeting, but some of those fears were calmed when the Fed adopted a softer stance regarding future rate hikes. Fed Chairwoman, Janet Yellen, introduced the idea that they would be willing to tolerate inflation temporarily overshooting its 2% goal. Bond and stock markets react positively given this softer outlook for future rate hikes.

Overall global growth continues to gain traction. It began in the middle of 2016 and has gained further strength following the US elections in November. Forward looking surveys and leading indicators remain red-hot (see chart below) and equity markets have responded positively. This has propelled some widely-used valuation metrics into very risky levels, but markets have predominately ignored them to date. Valuation metrics are not a good timing tool but that does not mean they should be completely ignored. We believe they are best used in conjunction with more timely readings on market and economic conditions. Our more-timely readings are compiled in our Equity Market Risk Odometer, which are currently bullish and looking for continued strength ahead. At some point, valuation will matter, but when that time comes is very difficult to predict. Our Equity Market Risk Odometer provides us a disciplined and objective framework for monitoring these conditions in a consistent fashion. For more information, visit our website at or email us at