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AAM Viewpoints – A Few Chinks in the Armor

It appears both the “Trump Rally” and the “Trump Agenda” are beginning to develop a few chinks in the armor, and it may be that the latter – or more specifically a lack of confidence in the latter – is causing the former. Concerning the rally the S&P 500 has now failed to make a new high for seventeen consecutive days which is the longest streak since President Trump was elected on November 8. In addition, the S&P 500 lost 1.24% on March 21, marking the first loss of greater than 1% since, coincidentally, an identical loss of 1.24% on October 11. Despite this, the S&P 500 is only a humble 2.17% off its all-time high set on March 10 and is not quite to the 3% pullback level yet, but we are definitely due as we haven’t experienced greater than a 3% loss since the 4.79% setback from 8/15/2016 – 11/4/2016. So, regardless of who is president and what their agenda is we continue to believe a mild setback for stocks is in the near-term cards.

Clearly the ambitious Trump Agenda is a bit strained at the moment and it may be more a function of the tos and fros and lacks of dos that has characterized Washington partisan politics for too long to recall, then the actual quality or feasibility of the agenda. However, the markets have definitely been pricing in not just talk of a growth-enhancing agenda but one that gets brought to fruition, and the odds of the full breadth of that agenda seeing the light of day are decreasing more and more every day (something we discussed last time). Does this sound the death knell for this now eight-year-old bull market? We don’t believe so as there are too many positive things going on both at the micro and macro level here and abroad.

We are now 99% done with 4th quarter earnings for the S&P 500 and we are happy to report that statistically (we track over 10 unique statistics) this is the best earnings season in two years and the S&P 500’s revenue growth of 4.91% is the best in over four years. In a nutshell, with S&P 500 earnings expected to grow about 19% in the next year and then double digits for the next two, we think earnings will continue to drive the U.S. equities markets higher. However, as always, we think investors need to stay diversified and patient and also make sure they are looking abroad and not just focusing on U.S. equities.

As investors look to dial up or down their investment rheostats, we think one area to focus on is away from the implied growth of the Trump Agenda to the organic and sustained growth of what we would characterize as quality growth. As an example, we mentioned in mid-December dialing up heath care exposure and dialing down financials. Since then (12/19/2016 – 3/24/2017) health care has outperformed by 6.63%. We don’t think that magnitude of outperformance will persist but we do feel with projected earnings growth of 21% that health care is still worthy of consideration despite all of the headline risk with the, for now, scrapped legislation to repeal and replace the Patient Protection and Affordable Care Act (PPACA or informally known as “Obamacare”).

Another quality growth theme that we believe is worthy of attention is the information technology sector. In this most recent quarter the information technology sector had the highest rates of both earnings and revenue upside surprises and with projected earnings growth of 31% we believe the fundamentals are in place for the information technology sector to continue to outpace the broader market.

The recent run-up in interest rates as the odds of an FOMC (Federal Open Market Committee) hike increased has exacted a toll on the equity income space including REITs (Real Estate Investment Trusts) and MLPs (Master Limited Partnerships). However, since raising their target rate for a third time on March 15, we have seen rates stabilize and move lower. This sprint and drift action has been persisting for quite some time and we expect it to continue and therefore feel it is a good time for investors to re-think the equity income side of the market as not only will you have income potential but also helping to balance the growth side of your portfolio and the potential to mitigate the volatility of a mild sell-off.

CRN: 2017-0306-5846 R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.

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Effective, June 10, 2016, please note that Gene Peroni left Advisors Asset Management (AAM) to become President of Peroni Portfolio Advisors, Inc. Peroni Portfolio Advisors, Inc. ("PPA") is an investment advisor independent of AAM.